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Eurekahedge - The Role of Independent Directors in Offshore Hedge Funds


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Eurekahedge - The Role of Independent Directors in Offshore Hedge Funds

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The Role of Independent Directors in Offshore Hedge Funds
EH Report Mark Beames* July 2004
The Eurekahedge Report
Awards The recent spectacular corporate collapses of Enron, WorldCom and Tyco in the United
November 2009 Asset Flows
States, Parlamat in Europe and HIH in Australia have wiped out billions of dollars of
Conferences Update
shareholder funds and have exposed serious shortcomings in corporate governance -
the system by which companies are directed and managed.
Fund Launches and 2009 Key Trends in Global Fund
Closures We have had scandal rocking the U.S. onshore mutual fund industry since the New of Hedge Funds
York State attorney general first charged the Canary Capital Partners hedge fund with
Archive improper trading in mutual funds which then embroiled well known fund groups such November 2009 Hedge Fund
as Putnam, Strong, Janus and Alliance Capital. Performance Commentary

Since these scandals have erupted, governments have introduced reforms for publicly Final Charity Updates from the
held companies and stock exchanges have introduced new rules and regulations and Asian Hedge Funds Awards
corporate governance guidelines. 2009

In the hedge fund world we have seen the implosion of the Manhattan Fund and more Interview with Dharmin Mehta,
recently the Lancer funds. COO of Capveda Asset
Management Limited
The scandals have shown a serious lack of effective oversight of corporate accounting
and financial reporting and a lack in managing conflicts of interest.
The More Things Change, the
The U.S. Securities and Exchange Commission is increasing its regulation of onshore More They Stay the Same
mutual funds and is considering some form of regulation of hedge funds. The offshore
hedge funds industry must consider evolving with these developments - investors will The Sophisticated Choice
require it.
Back Down the New Haven Line
A common theme of new reforms is the substantial enhancement of the independence
and responsibilities of boards of directors. New PE Firms Hedge Bets with
Pledge Funds
What is a Director
The Integration of ESG in
The role was invented centuries ago, dating at least since the establishment of the Emerging Markets
Dutch East India Company in 1602.
Islamic Foreign Exchange Swap
The basic function of directors is to oversee the affairs and activities of the company.
as a Hedging Mechanism
The company is a legal person - it has shareholders who legally own the enterprise. It
has an elected committee (known as the board of directors) who exercise delegated
authority (as agents of the shareholders) to manage the enterprise in accordance with
formal rules, specifically the memorandum and articles of association (or constitution)
but also the provisions of company and other laws in the jurisdiction in which it is

These rules vest the power to control and manage the company's property and affairs
in the board of directors. The director's central mission is to be diligent in
representing the interest of shareholders.

Non-Executive versus Executive / Independent versus Interested

Executive directors are full-time employees involved in the day-to-day management

of the company. Non-executive directors have a part-time and intermittent
involvement with the company.

There is however no legal distinction between executive and non-executive directors.

Non-executive directors have the same legal duties, responsibilities and potential
liabilities as their executive counterparts.

An "independent" director is one who is independent of management and free from

any business or other relationships which could significantly interfere with the
director's ability to act with a view to the best interests of the company.

The Fund Model

Like any corporation, an investment fund organised as a company has a board of

directors to oversee the operation of the business and to ensure that its corporate
policies are followed.

However a fund does not normally have employees of its own. Its operations are
typically conducted by enterprises hired by the fund. The fund's property, or
investment portfolio, is managed by an investment manager or adviser. A custodian
holds the assets, maintaining them separately to protect the shareholders interests. It
may have a prime broker through whom trades are executed, either directly or
indirectly, and financing and leverage facilities are made available. It will have an
administrator who maintains the books of account and produces the net asset value
calculations. It will have a registrar or transfer agent who processes all orders to buy
and sell the fund's shares and maintain its register of shareholders and it may have a
distributor or placement agent or sponsor who will promote and sell the shares to its
clients. It will also appoint outside law firms (both lead and jurisdictional) to provide
legal services to the fund. The fund, through its board of directors, is responsible for
negotiating and overseeing contracts with each of these enterprises who provide
services to the fund.

Under this structure it can be seen that the interests of the fund and its shareholders
differ from the interests of its investment adviser or management company.

Directors of investment funds are either "interested" or "independent". Interested

directors are employees of the fund's investment manager. Independent directors in
contrast will not have any significant relationship with the fund's manager, and I
would suggest, its other service providers.

Duties of Directors

Whether executive or non-executive, independent or interested, all directors have the

same d ties

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Eurekahedge - The Role of Independent Directors in Offshore Hedge Funds

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