Keeping the Hedge Fund Standards fit for purpose is an iterative process, and in line with its mandate, the HFSB responds to changes in industry practices and investor expectations by consulting publicly on improvements to the Standards from time to time.
All amendments resulting from the consultations (CP1-CP4) below have been incorporated in the Hedge Fund Standards (see Downloads section). A track changes version of the Standards comparing the latest version of the Standards (as of 05/2016, following CP4) to the previous version is available here.
In 2008/2009, investment funds faced significant investor redemptions, coinciding with an overall drop in market values, reduced availability of credit/leverage from Prime Brokers, and reduced liquidity in certain market segments such as emerging markets, small cap and convertibles. This put significant strain on the liquidity position of certain funds, and resulted in forced selling into depressed markets, thereby driving valuations even lower.
The Consultation Paper CP1 assessed potential systemic risk concerns and negative externalities that can arise in such situations, and proposed Standards and guidance to address these issues, including improved disclosure requirements regarding the handling of redemptions to ensure fair treatment of investors.
The Madoff scandal highlighted the importance of independent administration of funds (incl. Net Asset Value (NAV) calculation, cash management, transfer agency). The Consultation Paper CP2 proposed stronger arrangements in relation to the appointment of third party (independent of manager) fund administrators, and better investor disclosure.
The Consultation Paper CP3 set out a series of proposed amendments to the Hedge Fund Standards which are designed to achieve two things: to make the Standards more relevant internationally and to strengthen the Standards in the light of a number of issues that became apparent during the financial crisis:
Conflicts of interest can arise between a manager and its clients, and between different clients, and are usually caused by information asymmetries and/or lack of alignment. Consultation Paper CP4 focussed specifically on conflicts of interest that can arise between parallel funds (incl. parallel employee/partner funds). The new Standards seek to strengthen the managers’ arrangements to mitigate conflicts of interest and enhance the disclosure to investors.