Treasury Official Examines Hedge Fund Best Practices Efforts

The committees charged by the President’s Working Groups on Financial Markets with setting best practices for hedge funds will be finalizing its proposals in the coming months, reported Treasury Under Secretary Robert Steel. In remarks at a Managed Funds Association seminar, he noted that the final best practices will be built around five key areas: disclosure, valuation, risk management, sound trading operations, and codes of ethics. Further, since to be effective the best practices must be international, they will be coordinated with the best practices recently adopted by the UK Hedge Fund Working Group. The comment period on proposed best practices for hedge fund managers and investors expired on June 13.

Expanding on the five core principles that the best practices will be built upon, the official said that strong disclosure will give hedge fund investors what they need to make informed decisions. At the same time, robust valuation procedures will call for segregation of duties through written policies and oversight. Risk management practices will emphasize measuring and monitoring. The best practices will also reflect sound and controlled trading and business operations, as well as codes of conduct to deal with conflicts of interest. More broadly, he believes that adopting these practices across all aspects of the hedge fund business will help mitigate systemic risk and ensure investor protections.

The President’s Working Group set up two blue ribbon committees to develop best practices for hedge fund managers and hedge fund investors. The best practices for the hedge fund managers call on the funds to adopt standards in critical areas of business, including disclosure, valuation of assets, risk management, business operations, compliance and conflicts of interest. They are designed to parallel the set of best practices for asset managers developed by the UK Working Group.

The best practices for investors include a Fiduciary's Guide and an Investor's Guide. The Fiduciary's Guide provides recommendations to individuals charged with evaluating the appropriateness of hedge funds as a component of an investment portfolio. The Investor's Guide also provides recommendations for executing and administering a hedge fund program once a hedge fund has been added to the investment portfolio. In simple terms, these two guides help fiduciaries decide if hedge funds are appropriate for their portfolio and if so how a hedge fund strategy should be developed. The UK Working Group did not develop best practices for hedge fund investors.