Governance Matters for Alternative Investment Managers

Australian Dollars

The Financial Standard Online recently reported that Australian “super funds” have established a common set of principles “on how hedge fund managers should operate and manage risk”. The move is designed to improve investor confidence and attract more mandates.


What caught my eye in this article is that one of the major sets of principles is aimed at better hedge fund governance, something which we are witnessing a lot more of in our insurance dealings with Alternative Investment Fund Managers (AIFMs) globally.

Ramping up Due Diligence on Hedge Funds

Quasi-sovereign/ government agency funds are ramping up their due diligence on hedge funds before awarding investment mandates. This even includes looking at the insurance arrangements an investment manager has in place – and more to the point, that the manager has a full understanding of the actual risks that are mitigated through their insurance program.

We are also now seeing the emergence of consultancy firms who offer services to hedge funds and other alternatives to prepare them for the in-depth due diligence investors undertake with the aim of improving the chances of being awarded a mandate. According to one consultancy, insurance is one of the top five concerns for investors in the fund vetting process.

Benchmarking Study

The so-called “super funds” are also improving their awareness of governance and are becoming more sure-footed in their analysis. In fact, I was asked a few months back to undertake a global investment management insurance benchmarking study for one large investment fund. The objectives for the study were surprisingly wide ranging and included:

  • The types and level of insurance cover held by investment managers – by geography and asset class
  • Best practice policy wordings and global variation among leading insurance hubs
  • Claims analysis including causation breakdown

Increasing Pressure from Investors and Regulators

The aim of such analysis is to help the investors bring “appropriate challenge” to investment managers’ arrangements in the due diligence process because one professional indemnity (PI) policy is not the same as another! Investors are starting to push back if they do not get satisfactory answers to questions on risk mitigation and the result could be costly for a poorly prepared fund manager.

There is also pressure from European regulators in the form of the Alternative Investment Fund Managers Directive (AIFMD). No longer can alternative investment firms just buy a standard set of insurance policies without checking the details.

In the draft proposals, AIFMs are required to map their PI coverage to a range of professional liability risks to ensure policy wordings are fit for purpose. Insurance programs also need to comply with a range of “performance” criteria to minimize the chances of insurance failing.

With AIFMD looming, my colleagues in FINEX National have been experiencing a similar demand for protection from hedge funds, and have responded with a product that protects fund directors in the event of a collapse that exposes them to financial liabilities.

Private Equity Getting in on the Act

It was interesting to note at the recent Capital Creation conference in Monaco that private equity firms are also embracing the regulatory requirements for the AIFMD. Their interest is not purely regulatory compliance however, they are responding directly to the needs of potential investors as they enter future rounds of fund raising.

Whatever the reasons for jumping on the regulatory bandwagon, I believe that this trend towards improved governance will only continue to gain momentum in the alternative investment manager space.

About Paul Search

Paul is an Executive Director and Head of Risk & Analytics for FINEX Global, Willis’ financial, executive ris…
Categories: Australasia, Financial Services | Tags: , , ,

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