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Managed Funds Association ’ s Sound Practices for Hedge Fund Managers 2009 Edition. Sound Practices History. First published in 2000 Four revisions: 2003, 2005, 2007 and 2009 New edition incorporates PWG Best Practices Report of Asset Managers ’ Committee
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Managed Funds Association’sSound Practicesfor Hedge Fund Managers 2009 Edition
Sound Practices History • First published in 2000 • Four revisions: 2003, 2005, 2007 and 2009 • New edition incorporates PWG Best Practices Report of Asset Managers’ Committee • Heightened standards of excellence to restore investor trust • Due diligence questionnaire provides tools for investors • Hedge funds have strong role in helping to restore financial stability and economic recovery
Global Context • As G-20 gathers, MFA is taking steps to restore investor confidence • G-30 Report on financial system stability says: • “The process, to be effective, depends on mutual trust. Trust based on confidence in the integrity of institutions and the continuity of markets.” • MFA now working on unified best practices for Financial Stability Forum (FSF) due April 30, 2009
Part of MFA’s Global Efforts • MFA works with IOSCO to develop global standards for portfolio valuation principles • MFA works with IOSCO on task forces to prepare for G-20 • MFA works with European Commission, meets frequently with European Parliament in Brussels • MFA has met with G-7 Finance Ministers
Objectives of Sound Practices • Strengthen business practices of hedge fund industry through a strong framework of internal policies and procedures • Encourage individualized assessment and application of recommendations • Enhance market discipline in global financial marketplace to prevent systemic risk
Due Diligence Questionnaire • Industry commitment to investor protection • Encourages best practices in communication between funds and investors • Provides more detail than offering documents • DDQ in 3 main sections: • Investment manager overview • Overview of activities of investment manager • Fund information • More qualitative questions than any • Seeks details on personnel, service providers, other businesses, conflicts of interest and investor communications
What’s New in 2009 Edition? • Represents major overhaul • Incorporates PWG Asset Managers’ Committee Best Practices • Vastly comprehensive guidance on responsibilities to investors, disclosure and investor protection
Seven Major Sections • Disclosure and Investor Protection • 2) Valuation • 3) Risk Management • 4) Trading and Business Operations • 5) Compliance, Conflicts and Business Practices • 6) Anti-Money Laundering • 7) Business Continuity/Disaster Recovery
Disclosure & Investor Protection • Disclosure framework: • PPM, audited financials, performance, regular communication with investors • Material information: • Scope of fund’s operations • Responsibilities to investors • Conflicts of interest • Participation of Investors • Disclosure to counterparties
Valuation • Valuation framework • Valuation governance • Implementation of valuation policies • Valuation policies and procedures • Adopt and implement written policies • Identify responsible person or team • Identify pricing sources • Adopt accounting standards (eg GAAP, IFRS) • Set-up internal documentation • Establish policies for valuing hard-to-value assets • Include guidelines on side pockets
Risk Management • Risk is inherent and essential to returns • Goal of risk management is not to eliminate risk, but to understand it and manage it prudently • Overall approach should include risk profiles for each fund and appointment of Chief Risk Officer • Periodic review of risk measurement, monitoring and management procedures • Identify categories of risk: • Liquidity risk • Leverage risk • Market risk • Counterparty credit risk • Operational risk • Legal and compliance risk
Trading and Business Operations • Develop integrated framework to manage trading and operations • Conduct due diligence on counterparties • Develop cash management and collateral management framework • Select and monitor reputable key service providers • Develop core infrastructure and operational practices • Include practices for OTC derivatives and complex products • Develop and monitor systems for core accounting practices • Develop and monitor information technology practices • Seek best execution in trading activities
Compliance, Conflicts, Business Practices • Establish culture of compliance • Adopt written Code of Ethics • Develop written compliance manual • Train and educate personnel about compliance • Dedicate resources to compliance and appoint Chief Compliance Officer
Anti-Money Laundering • MFA’s pioneering AML Guidance first published in March 2002, following enactment of PATRIOT Act • Although Treasury has not issued rules, hedge funds should adopt and implement AML programs • MFA’s AML Guidance update in 2007 • Guidance now inside SoundPractices (no longer appendix)
Business Continuity/Disaster Recovery • Establish plan objectives to provide for continuation of essential operations in event of natural disaster, market disruption, terrorist attack, loss of key person or business emergency • Detail mission-critical systems • Identify personnel to achieve objectives • Replicate technology systems • Train and test at least annually • An oversight person or team should be responsible for regulatory reporting and compliance • Create business continuity, contingency and succession plans • Plan for crisis management and disaster recovery • Understand and use government resources as necessary
Managed Funds Association’sSound Practicesfor Hedge Fund Managers 2009 Edition