Sound Practices for Hedge Fund Managers

The Managed Funds Association updated its Sound Practices for Hedge Fund Managers (.pdf) in November, 2007 in response to the initial drafts of the President’s Working Group on Financial Markets.

The objectives of Sound Practices are to:

  • Strengthen business practices of the hedge fund industry through a strong framework of internal policies and practices
  • Encourage individualized assessment and application of recommendations
  • Enhance market discipline in the global financial marketplace

Sound Practices, which was originally published in 2000 and is now in its fourth edition, provides peer-to-peer recommendations for establishing standards of excellence in virtually every aspect of business. The recommendations included in Sound Practices are divided among the seven topics listed below:

  • Management, Trading, and Information Technology Controls
  • Responsibilities to Investors
  • Determination of Net Asset Value
  • Risk Management
  • Regulatory Controls
  • Trading Relationship Management, Monitoring, and Disclosure
  • Business Continuity, Disaster Recovery, and Crisis Management

What is a Hedge Fund?

The President’s Working Group on Financial Markets Report of the Asset Managers’ Committee uses this as a definition of “hedge fund.”

By “hedge fund” we mean a pooled investment vehicle that generally meets most, if not all, of the following criteria:  (i) it is not marketed to the general public (i.e., it is privately offered), (ii) its investors are limited to high net worth individuals and institutions, (iii) it is not registered as an investment company under relevant laws (e.g., U.S. Investment Company Act of 1940), (iv) its assets are managed by a professional investment management firm that is compensated in part based upon investment performance of the vehicle, (v) its primary investment objective is investing in a liquid portfolio of securities and other investment assets, and (vi) it has periodic but restricted or limited investor redemption rights. (This description is based in part on the definition in the Managed Funds Association’s 2007 Sound Practices for Hedge Fund Managers.) Although hedge funds may invest in private equity and real estate, this Report is not addressed to the specific considerations of private equity or real estate funds.  We use the terms “alternative asset manager” and “manager” to refer to the entity that establishes the investment profile and strategies for the hedge fund and makes the investment decisions on its behalf.

President’s Working Group on Financial Markets Reports

globe200pxAsset Managers’ Committee and the Investors’ Committee of the President’s Working Group on Financial Markets Reports have released their best practices reports for hedge fund managers and investors, respectively: Asset Managers’ Committee Report (.pdf) and the Investors’ Committee Report (.pdf).

In the Asset Manager’s Committee Report:

A Manager should establish a comprehensive and integrated compliance and business practices framework that is supported by adequate resources. The goal of the framework is to provide guidance to the Manager and its personnel in respect of ethical, regulatory compliance and conflict of interest situations. Critical to the success of the framework is a strong culture of compliance.