Cayman's Fund governance: reigning the board of directors

Following similar steps by other jurisdictions  the Cayman Islands Monetary Authority ("CIMA") intend to update its corporate governance guidance  The regulator has posted a consultation paper on its website and has appointed Ernst&Young to perform an industry survey on the topic.

Beyond the reshuffle of its broad corporate governance principles, to align them with international standards, the CIMA is again questioning the right approach to directors supervision. The regulator is considering several improvements to govern the directors' population:

• Require all the individuals providing directorship services to Cayman's regulated entities to register with the CIMA
• Require individuals acting as directors on more than 6 regulated entities to seek approval from the regulator
• In order to improve transparency, the CIMA intend to develop a public database providing limited information on the directors of Cayman's regulated entities. 

Through the industry survey, the CIMA wants to evaluate the pertinence of other measures pertaining to the total number of directorship held by a director. The regulator is considering to require the total number of directorship to be disclosed in the fund's constituting documents and even to impose a limit on this number.

Those steps are clearly aimed at better controlling two categories of directors: the professional directors who sit on a large number of boards and the "blank check" directors who do not provide any oversight and just collect their coupon.

Comparing the current and proposed "Standards of Corporate Governance", the following changes are interesting:

• the requirement for directors to request regular information from their funds' service providers
• the new text emphasizes the need for a documented distribution of responsibilities between the various stakeholders and and appropriate oversight of those delegated functions
• the new standards require the setup of a compliance committee and other sub-committees as needed

Those changes will require from the directors a proactive stance in  seeking information from the service providers and the setup of an appropriate oversight framework of the delegated functions.

The proposed guidance is bringing the Cayman Islands closer to the standards used in European UCIT funds. Several improvements specific to the fund industry could be incorporated in the updated standards like:

• a majority of independent directors
• quarterly board meetings with at least one meeting per year with physical attendance by the directors
• increased transparency through the proposed public database (i.e, name of the service providers, last audit date)

Investing with a three years time horizon

Typically, investors claim that they look several years out when they choose an investment. In reality, the turnover of their portfolios will tend to be much faster due to drawdowns. Even with pension funds' assets/liabilities management style, it is sometimes difficult to convince trustees to hold a loosing investments. The graph below represents the 3 years rolling returns of hedge funds  and US equities.  Hedge funds have overperformed US equities in 75.5% of the 192 three years period between December 1993 and November 2012. Furthermore, hedge funds have lost money (-1.33%) in only one period compared to US equities which were in a drawdown during 69 periods.  A pension fund targeting a 2% annualized return over three years will have delivered in 80% of the period by being fully invested in hedge funds.

3 Years rolling returns from December 1993 to November 2012
Dow Jones Credit Suisse Hedge Fund Core Index/S&P 500 (^GSPC)

Disappointment is all relative

In general, investors feel disappointed by the recent performance of hedge funds. The level of disappointment is a function of the distance between facts and expectations. In the case of hedge funds, both variables are misunderstood and biased.

The facts, or the risk/reward of hedge funds in our case, measured by returns and volatility, are not easily observable. Several indices, like the Dow Jones Credit Suisse index series, try to capture the overall hedge funds' characteristics. They differ in their construction methodologies, components and are distorted by well known biases like the survirvorship bias. Therefore, results can differ significantly from one to the other. The return YTD at the end of November was 6.10% and 2.57% according to the Dow Jones Broad Hedge Fund Index and the HFRX Global Hedge Fund Index respectively. A significant 3.5% difference. Even if we assume that anyone of them provide a good representation of the hedge fund investment universe, none of them is investable, compared to equity indices which are accessible to investors through many instruments (ETF, futures, mutual funds ...). In fact, each investor have only a subset of the 7'867 single manager hedge funds reporting at the end of November 2012. Therefore, investors' individual performance will likely diverge particularly since performance dispersion has been high recently. For the 12-month period ended Sept. 30, the top 10 percent of funds reported an average gain of 34 percent, while the bottom 10 percent saw an average 19 percent loss, according to Hedge Fund Research Inc. of Chicago.


As we have seen, the benchmark that actual or potential investors shall use to measure their disappointment is to say the least blur. The problem become even more acute when we look at investors' expectations from hedge funds.

Funds of funds reinventing themselves

Infovest21, a New-York based provider of information and research to the hedge fund industry, has just released its 2010 fund of hedge funds survey. The main finding, brought forward in the firm’s related announcement, is that “Funds of funds add more nimble managers, prefer small to medium-sized managers”. The contrary would have surprised me.


The last financial crisis has allowed investors to distinguish between the good and the bad (less the lucky ones) in the fund of funds industry. During the glorious years for hedge funds, between 2003 and 2007, managing a fund of funds was a reasonably easy task. According to the Dow Jones Credit Suisse Hedge Fund index, the hedge funds delivered a total net return of almost 75%, corresponding to a compound annualized ROR of 11.79%, during those 5 years. The low barrier to entry drove to the industry a lot of managers who realized the strong potential to earn over 2% (based on the standard 1% management fee and 10% performance fee) on managed assets with little research costs (who ever heard about due diligence at that time anyway). According to the Infovest21 survey, today the average fee structure is a 1.1% management fee with a 6.1% performance fee. All those new entries brought strong competition for assets amongst fund of funds managers and therefore a need to develop a real edge. The development of a real competitive advantage was not about adding leverage or investing in exotic/ not well known “alphabet soup” strategies but it was about building a strong research and adheres to high due diligence standards. The ones who picked the first two options are probably no longer in existence today or are still struggling to liquidate their portfolios.

Useful links page

I have compile a list of useful links to facilitate the search of public information about your favorite hedge fund managers.

Click here to access the list or clisk on the "Useful links" tab on the menu at the top of the page.

I hope you will find this ressource useful.

Don't hesitate to suggest additional ressources.

Operational staff challenged by investors' expectations

In order to raise assets for your hedge fund, it is no longer enough to involve the portfolio manager and a client rep. Every employee of the firm need to work at meeting the investors' expectations.

The good news for investors is that, according to a poll recently released by SEI, it appears that CFOs are aware of this new obligation.

According to the poll, conducted recently at the company’s annual Hedge Fund CFO Forum, addressing new regulatory requirements and meeting evolving investor expectations are the biggest challenges for 2011.

Read the press release from SEI here.

A new Star(r) in the Wall Street's hall of shame

Kenneth Ira Starr was arrested in May 2010 for a fraudulent scheme he ran for about a year and through which he had been able to misappropriate over $9 million from his advisory clients.


According to the claim brought by the SEC against him, Starr prior to his arrest managed over $700 million through Starr Investment Advisors LLC on behalf of around thirty high net worth clients.

The scheme was made possible since Starr had power of attorney or signatory authority over many banks and investment accounts belonging to his clients. Furthermore, Starr had custody of some of his clients’ assets also he was not a qualified custodian. Moreover, certain clients’ assets were held in a physical form in a safe at Starr’s office.