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The Board of Directors in Alternative Investment



John McCann

Corporate governance of alternative investment funds has undergone increased scrutiny since the 2008 financial crisis. The roles and responsibilities of the board of directors and how an effective board addresses shareholder interests within a fund have made major headlines and become of increasing interest to investors. The recent examples of the Weavering court cases in the United Kingdom and the Cayman Islands are a useful source to explore some of the ways in which an ineffective board of directors generates poor corporate governance, and produces adverse effects for an investment fund and its shareholders. John McCann

In April 2012, in his outgoing speech as CEO of the Financial Services Association (UK), Hector Sants discussed the need for improved corporate governance and the symptoms which contributed to the failure of financial firms over the last five years. He identified the indicators of financial failure as follows:

–    A dysfunctional board
–    A domineering CEO
–    Key posts held by individuals without the correct technical expertise
–    Inadequate oversight of risk
–    Inadequate understanding of the aggregation of risk

Although Hector Sants’ speech referred to financial firms in general, his views on corporate governance are also relevant to the corporate governance of alternative investment vehicles.

Board Composition

One of the symptoms listed of a fund heading for failure is a dysfunctional board. A fund ensures that its corporate governance is well executed by laying out a suitable structure, corporate attitude and monitoring follow through. An effective board is composed of members who understand how an investment vehicle could fail and therefore must possess the correct technical competence and experience to comprehend and anticipate these potential circumstances. In addition to the relevant knowledge and experience, board members who possess the desired values and character are also an asset to a firm.

To achieve the desired variety of board members, the presence of independent non-executive individuals is an extremely effective way of bringing an outside perspective to a company. Independent board members allow for greater emphasis on investor needs. Executive directors are usually affiliated with the investment managers, or advisors and are thus highly involved with the fund’s day to day running. Therefore, the managers and advisors benefit from having an outside perspective when making important decisions for the fund. As the title suggests, independent directors must not have any financial interests within the fund, in order to provide a truly independent viewpoint. Independent directors do not take part in the daily discretionary investment management of a fund and to ensure their neutrality, should not be involved in these decisions.

Independent directors can be sourced from independent director firms, or there are many established independent directors from the investment industry offering their services. Board members do not need to all possess the same level of expertise; in fact it is more desirable to include a diverse range of expertise and experience which encourages a superior level of debate and less ‘group think’ among board members.

Decision Making

Meaningful debate among members is essential to a competent board of directors. A board needs to regularly challenge the decisions that they are asked to make and ratify at board meetings. As has been covered in the media, the Weavering hedge fund case, (to be discussed further in detail), demonstrated how failure by board members to challenge decisions resulted in a major lack of oversight of the fund’s activity. As such, it is recommended that each decision be subject to the correct amount of debate, where all potential risks are covered before a final decision is taken.

Directors of an investment vehicle are required to take a broad range of decisions. For an investment fund, directors should review the Offering Memorandum (“OM”). The OM relates to the fund’s strategy, and overall operational activities of the fund. Some of the important points to cover within the OM are trading instruments, information on counterparty exposure risk, and redemption and subscription procedures. On establishment, cases can occur whereby a board is overloaded with management information, obscuring the relevant information and constraining debate on the key issues. It is therefore recommended that meeting briefs are carefully prepared, and in good time, to ensure the correct content is present in the necessary level of detail.

Content to be covered during meetings

In order to ensure that the agreed strategy for the fund is properly executed, it is recommended that a board ensures a flow of information in order to monitor the implementation. This increases the effectiveness of subsequent meetings and allows for the correct preparation of meeting briefs. Directors must be familiar with and understand the investment vehicle’s official documentation, including the Articles of Association and the OM. The Articles of Association set out the duties of the board and guidelines for meetings proceedings.

Directors may also be required from time to time to review and approve written resolutions, which are legally binding. Resolutions can be signed outside of meetings, and are generally considered approved after all directors have signed. Directors should ensure that any such changes referred to in the resolutions are legal under the corporate documents and discern the reasoning for such changes to the functioning of the fund. It should be established that any decisions taken which concern a certain group of shareholders do not adversely affect another group of shareholders. Typical share dealing matters contained in written resolutions include waiving or reducing notice periods, application of gates, redemptions proceeds or any variances to the dealing procedures set out in the OM.

The overall financial performance of the fund is an important topic for directors to cover as well. At the end of an accounting year, the board are required to review and approve the audited financial statements of a fund.

Investor communications are another possible item on a board meeting agenda. These are sent to investors on a regular basis in order to inform them of the overall performance of the fund and to explain how the investment strategy has played out since the last investor update. These are very important during lower performance times for a fund, in order to reassure investors. The investment manager composes the investor letter, and it is useful for independent directors to use their expertise to review communications and ensure a suitable investor letter is issued.

If conflict were to occur between an investment vehicle and service providers to the fund, such as administrators or prime brokers, this can be mediated by independent directors.

There are no requirements regarding who prepares the agenda for a board meeting, however it is generally the corporate secretary who drafts the agenda and prepares the minutes arising from a meeting. It is recommended that a service provider who is experienced in this capacity takes this role, in order to convene board meetings and circulate the relevant documentation in accordance with the statutory documents of the fund. Service providers such as administrators and directors can perform this duty. Notice requirements can be found in the funds articles which should be adhered to when drafting the notice and incorporating the agenda. The preparation of the minutes is highly important in order to ensure that there is accurate recording of the relevant issues that were discussed and debated in order to come to the most appropriate decision, as well as allowing the corporate secretary to note and document concerns and responsibility for appropriate follow up measures.

Delegation of Duties: Weavering

The case of the Weavering fund was a seminal case for hedge funds all over the world, after its $600 million collapse in 2009. The Cayman Islands’ civil case found two non-executive directors guilty of wilful default in the discharge of their duties. In a 37 page judgement by Justice Andrew J. Jones, he explained the requirements and expectations to which directors of alternative investments funds are subject to. It was emphasised that non-executive directors should be competent and knowledgeable, and should not allow for the dominance of one individual over the board, which is what is deemed to have occurred in the Weavering case.

In addition to the Cayman Islands’ investment court case relating to the independent directors, the High Court in the UK found Weavering’s manager Magnus Peterson guilty of fraud, two executive directors of the fund directors guilty of negligence which allowed fraud to happen, and a highly paid employee of the fund guilty of negligence. Following this judgement, the UK’s Serious Fraud Office (“SFO”) decided to reopen the case against Magnus Peterson which had been dropped in 2011.

In both the UK and Cayman Islands rulings, the poor corporate governance at one Weavering fund was highlighted, where non-executive directors were not considered suitably independent, or fit for their role. Of the non-executive directors convicted in the Cayman case, one was Magnus Peterson’s younger brother, and one was his step father. The judge in this case found that although Magnus Peterson’s company Weavering Capital UK was designated to be the fund’s ‘advisor’ in the OM, Weavering Capital UK was in reality acting as the investment manager. Thus, the decisions made regarding the assets of the fund were controlled by Magnus Peterson and it was found that the necessary level of debate required to reach reasonable, investor driven decisions did not occur.

In the UK case, a similar line was taken in relation to the fund’s corporate governance, where Mrs. Justice Proudman found that Magnus Peterson managed the fund however he saw fit, without being held accountable by the board of directors. It was also found that Mr. Peterson did not comply with the investment restrictions outlined in the fund’s OM, whereby the Weavering Macro Fixed Income Fund Ltd. engaged in fictitious interest rate swaps, incorrectly inflating the fund’s NAV for its investors.

The Weavering case also highlighted the issue of delegation of the various functions of an investment fund including investment management, administration and accounting to professional service providers. This practice does not reduce the level of responsibility of directors. In fact it increases the requirements for enquiry and supervision of the roles that service providers play in the fund’s operations. Directors should be able to regularly verify that a third party service provider is performing its duties in accordance with the relevant service provider agreement.

Furthermore, heavy influence of an investment manager should not prevent directors from raising concerns. In the Weavering case, it was found that directors had signed documents without close inspection of their contents.

Corporate Governance after Weavering

Weavering, although a detrimental case for its investors and various creditors, also serves as an important source of education and potential improvement for the alternative investment community as a whole. The problems highlighted during the Cayman Islands ruling and the UK ruling show strong parallels with the issues articulated by Hector Sants in his outgoing speech as FSA CEO. The presence of a domineering CEO, who has more influence than his or her whole board of directors is a major barrier to effective monitoring of the various decisions to be made.

The ineffective board, lack of expertise of board members, proximity of independent directors to the investment manager (brother, stepfather) and lack of risk oversight all contributed to a poorly performing board of directors. As a consequence, it was deemed that decisions were not made based on the best interests of the shareholders. This is a highly influential case for all members of the investment management industry, as there has been a shift towards greater demands for transparency from financial regulators on a global scale, as well as from investors who are becoming more sophisticated and learning from these types of examples.

As such, it is understandable that the provision of documents which prove that board members met, discussed and debated relevant issues, is increasingly essential. An experienced corporate secretary who provides the relevant documentation pre-meeting, during a meeting, and takes appropriate measures post-meeting is invaluable in this respect.

The applicable domicile of choice will often provide guidance on how good corporate governance can be achieved. For example Ireland, the biggest hedge fund domicile in Europe, introduced the Corporate Governance Code for Collective Investment Schemes and Management Companies at the beginning of 2012. It is understood that Guernsey is developing a similar code and the Cayman Islands Monetary Authority’s Statement of Guidance on Corporate Governance is under policy review. Companies can conduct ‘gap analyses’ in order to determine where their board needs to increase effort to comply with the recommendations and govern the investment vehicle to the highest standard possible.

Globally, corporate governance for investment funds is undergoing close examination, in an effort to prevent failure of financial firms in the future.  This can only be achieved if a proactive approach is taken in order to ensure that boards of directors possess the right amount of expertise and that this expertise is utilised efficiently via the correct procedures and information flows.

For further information on any of the topics covered please call +1 345 743 6622 or email [email protected] or visit our website at





Are clients truly getting value from their BR solution?



Are clients truly getting value from their BR solution? 1

By Matt Dickens, Senior Business Development Director at Ingenious

Financial planners and wealth managers strive to deliver on the needs of their clients by always providing the most suitable and effective advice. But as with any service, this advice should also be delivered at the best possible value for the investor. Value can be simplistically defined as the service that delivers the most benefit, balanced against the financial cost, but in the estate planning space, how do you assess what good value is?

1. Total fees and charges

Product fees are guaranteed to negatively impact returns, so it is important to minimise their impact when looking to gain the best value from the investment. Some managers report little or no fees paid by the investor to the manager, but instead charge the company or investment service itself. While this might initially be seen as better value for the investor, it is not as simple as that. Investors in unlisted BR services become a shareholder of the portfolio companies, so the reality is that any fees paid by the companies are effectively being paid by the shareholder (or investor). Therefore, both investor fees and company fees will both negatively impact the final return and must be considered together.

Analysis of what a manager is paid by the investor and by the company over a significant period will enable an adviser to conclude if the manager is offering good value, or if a disproportionate amount of fees is going to the manager at the expense of their investors.

2. Real investment returns

Another key component of assessing value is what the investment actually delivers. For BR solutions, investors’ main objective is commonly to pass on the maximum sum possible to their beneficiaries upon death. This may lead to a conclusion that delivering Inheritance Tax relief at the lowest possible cost is the primary driver of value. However, especially for clients with longer time horizons, the one-dimensional goal of avoiding a potential 40% Inheritance Tax bill can easily over-shadow the equally important goal of aiming to steadily grow the investment, preventing erosion by inflation, drawdowns and investment fees. Unlike some IHT-focused solutions, such as trusts or gifting, investors in BR services do not have to accept zero growth of their wealth from the point of investment.  Instead, investors can continue to earn returns, either taking an income stream or increasing the final sum to be passed onto their beneficiaries, precisely in line with their original objective.

While most BR managers predict their ongoing returns at a certain level, those targets are not guaranteed and historic performance varies widely.

3. The relationship between fees and risk

Given that the majority of managers in the BR space state their performance targets net of fees, to produce positive growth and achieve their target return, those managers must first earn back any fees they are taking. Let’s take the below scenario to illustrate this point.

 Are clients truly getting value from their BR solution? 2Manager 1

Annual performance target, net of fees: 3%

Annual fees: 3%

Gross performance target: 6%


Are clients truly getting value from their BR solution? 3Manager 2

Annual performance target, net of fees: 4%

Annual fees: 1%

Gross performance target: 5%

Initially, it might appear that Manager 2 must be taking more risk to target a higher net return of 4% than Manager 1, who is targeting 3%. However, Manager 1 has to deliver an additional 2% of gross return than Manager 2, to make up for charging higher fees. Higher fees not only impact returns and value, but they can also mean greater risk.

Market comparison

In the Tax Efficient Review’s most recent analysis of Unlisted BR Services1, they released data that ranks services in the market in terms of both investor returns and total fees. IEP Private Real Estate achieved the top rank for returns delivered, with the second lowest total fees in the market, demonstrating that it represents attractive value for investors in comparison to other services.

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Reuters Events Launch Global Investment Summit Online Edition Uniting Institutional Investors, Asset Owners & Financial Institutions



Reuters Events – today announced the agenda for their Global Investment Summit (Dec 3rd -4th). The 2-day strategic summit has been reimagined in the era of social distancing and will be broadcast free of charge to the public.

This Summit, with a diverse range of international voices and anchored by Reuters News-led sessions, is the only place for institutional investors, asset owners and financial institutions to come to terms with the events of 2020.

Click for more information and for complimentary registration to the online edition

The Energy Transition team report an industry leading speaker faculty for 2020, including:

  • Eileen Murray, Chair, Finra
  • Philip Lane, Chief Economist, European Central Bank
  • Gregory Davis, Chief Investment Officer, Vanguard
  • Hanneke Smits, CEO, BNY Mellon Investment Management
  • Pascal Blanque, Chief Investment Officer, Amundi
  • Desiree Fixler, Group Chief Sustainability Officer, DWS
  • Joe Lubin, CEO, Consensys
  • Bahren Shaari, CEO, Bank of Singapore
  • Mark Machin, CEO, Canada Pension Plan Investment Board

The agenda released by Reuters Events Investment is both ambitious and comprehensive, and will cover four key themes: Market Outlook, Asset Management Strategies, Industry Deep-Dives and the Future of Investment.

View the full agenda here

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Halliburton & Baker Hughes CEO’s join Reuters Events: Energy Transition 2020



Reuters Events – today announced that CEO’s of two of the world’s leading energy service companies, Halliburton and Baker Hughes, will join the speaker faculties for their flagship Energy Transition Summit.

The event will explore the creation of the future energy ecosystem and offer companies, from across the asset spectrum, a definitive guide to their net-zero strategies. The alignment of the two biggest O&G global service companies, Halliburton and Baker Hughes, represents a significant step in the transition to low-carbon energy

More information on the Europe and North America editions can be found below. Registration for the LIVE stream is free.

Alongside their CEO speaker representation, Halliburton join as Platinum sponsors of the North American edition. Baker Hughes join as gold sponsors for the European edition of the flagship energy transition program.

The Energy Transition team report an industry leading speaker faculty for 2020, including:

  • Lorenzo Simonelli, Chairman & CEO, Baker Hughes
  • Jeff Miller, CEO & President, Jeff Miller
  • Tristan Grimbert, CEO, EDF Renewables
  • John Pettigrew, Chief Executive, National Grid
  • Pratima Rangarajan, CEO, OGCI Climate Investments
  • Alex Schneiter, CEO & President, Lundin Energy
  • Gretchen Watkins, President, Shell Oil Company
  • Calvin Butler Jr., CEO, Exelon Utilities
  • Francis Fannon, Assistant Secretary ERB, S. Department of State
  • David Lawler, Chairman & President, bp America
  • Andreas Schierenbeck, CEO, Uniper

More information on the Europe and North America editions can be found below. Registration for the LIVE stream is free.

Governance & Cooperation – Does the energy transition face a ‘governance deficit’? To understand how the energy transition will develop over the next decade, it is crucial to understand the driving governing forces behind it. Will the Green Deal provide the first domino, how can we ensure progress in the shadow of Aberdeen and ensure that we translate targets into action?

Financing Energy Transition – We must address the elephant in the room; who is going to pay for it all? An understanding of where the funds are likely to come from is key to staking claim to the infrastructural projects that will redefine the modern world in the 21st century.

New Energy Infrastructure – Low-carbon energy supply and consumption will need a radical overhaul of infrastructure. As well as revamping the old, we’ll need entirely new assets and new systems of energy delivery. It’s an unprecedented opportunity with estimated spending at $70 trillion over the next decade. Knowing which technologies are ready to be scaled first is the key to understanding opportunity

Business Model Innovation – Who will provide leadership through the age of transition and how do we want our future energy system to look? Speed and timing will be crucial if you are to stay on the right side of the transition. Join us in setting business led, evidence based, targets as industry drives towards net-zero

More information on the Europe and North America editions can be found below. Registration for the LIVE stream is free.

At Reuters Events, we’re committed to tackling the Energy Transition head on; to shed light on the defining issue of our time and help energy companies meet a uniquely difficult challenge. That is, to be both an energy company of today, and the energy companies of tomorrow. In a period that will be defined by uncertainty we can, together, lighten the way forward.” – Owen Rolt, Head of Energy Transition, Reuters Events


Owen Rolt

Head of Energy Transition

Reuters Events

UK: +44 (0) 207 375 7596

E: [email protected]

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Editorial & Advertiser disclosureOur website provides you with information, news, press releases, Opinion and advertorials on various financial products and services. This is not to be considered as financial advice and should be considered only for information purposes. We cannot guarantee the accuracy or applicability of any information provided with respect to your individual or personal circumstances. Please seek Professional advice from a qualified professional before making any financial decisions. We link to various third party websites, affiliate sales networks, and may link to our advertising partners websites. Though we are tied up with various advertising and affiliate networks, this does not affect our analysis or opinion. When you view or click on certain links available on our articles, our partners may compensate us for displaying the content to you, or make a purchase or fill a form. This will not incur any additional charges to you. To make things simpler for you to identity or distinguish sponsored articles or links, you may consider all articles or links hosted on our site as a partner endorsed link.

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