However, the times have definitely changed in the last three years, with hedge funds growing at break-neck speed and many opening their doors to investors who may have no previous alternative investment experience. Earlier this year, the SEC held a public roundtable on the hedge fund industry, when chairman William Donaldson said the agency’s probe of the industry had highlighted worries about “potential conflicts of interest, questionable marketing tactics, valuation concerns and market impact of hedge-fund strategies.”
In response to this, Washington DC- based MFA – a trade association representing professionals who specialize in alternative investment strategies including hedge funds, funds of funds and futures funds – said this year’s version of its sound practices has sought to make the recommendations applicable to a broader range of hedge fund managers and to take account of evolving management practices in the industry. This is in an effort to further the MFA’s belief that the most effective form of industry oversight is self-evaluation combined with self-discipline and self-policing; an attempt to dissuade the SEC from any tighter controls on the industry, such as requiring more managers to submit to regulatory oversight andlimiting who can invest.
To accomplish this, the recommendations contained in the 2003 Sound Practices are divided among the following six topics:
- management and internal controls
- responsibilities to investors
- valuation policies and practices
- risk monitoring
- regulatory and documentation controls
- business continuity and disaster recovery.
Regardless, the MFA still stresses that the wide variety of organizational structures and investment strategies in the global hedge fund industry makes it impossible to take a “one-size-fits-all” approach to sound practices, and consequently, each hedge fund and hedge fund manager should assess the document’s recommendations and apply them as appropriate, based on the fund’s particular business model and circumstances.
A copy of the 124-page business practice tome can be found at www.mfainfo.org .