The hedge fund sector must do a better job of disclosing the “inherent” conflicts within its business model, argues New York-based Ionic Capital Management.
Speaking at a Bloomberg Institutional Investor roundtable this week, Ionic chief operation officer John Richardson said conflicts are an “inherent part of the asset management business”.
Whilst conflicts cannot be completely eliminated, managers must identify, disclose, and adapt appropriate policies and procedures to address them, he said.
Mr Richardson noted issues surrounding valuation, side letters, trade allocation and co-investment schemes as the foremost issues pertaining to conflicts of interest.
Such concerns continue to make hedge funds a “pretty hot topic with investors and regulators”, he said.
In line with Mr Richardson’s argument, The Hedge Fund Standards Board (HFSB) has sought to address the various conflicts associated with hedge fund investment schemes.
HFSB executive director Thomas Deinet said: “We have established a framework of standards, where managers sign up to these standards.”
“It is basically a collaborative platform to bring the users and consumers of this market together to determine what the right standards are.
“Clearly, at the heart of this is addressing investor concerns, concerns in relation to transparency, [and] governance,” Mr Deinet said.
The HFSB Standards address key investor concerns, facilitate investor due diligence and provide a benchmark for managers, according to the HFSB.
In addition, ASIC has enacted measures to improve transparency and disclosure within the hedge fund industry.
The regulator developed a set of disclosure benchmarks in the regulations guide 240, Hedge Funds: Improving disclosure, so that investors are better informed before they invest.
ASIC commissioner Greg Tanzer told the audience at yesterday’s roundtable: “We at ASIC have been very busy engaging with funds and investors to understand developments in the markets and address key concerns.”
ASIC is due to release a report into hedge fund risk later this year as a follow up to the 2013 report titled, The Australian Hedge Fund Sector and Systemic Risks (report 370).
The new report will focus on non-banking risk such as maturity transformation, liquidity transformation, leverage and imperfect risk transfer.
ASIC has previously noted that hedge fund investors “can be exposed to more complex risks than investors in funds pursuing more ‘vanilla’ investment strategies".
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