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"It is not reasonable that any director can truly independently understand and monitor the full range of risks and complexities in today's highly sophisticated hedge fund" |
Hedge fund failures as a result of sub-prime bets or credit crunch-related losses have increased the need for independent directors at hedge funds. "Historically, corporate governance was viewed as inconsequential in the hedge fund industry, but the recent hedge fund failures have demonstrated the enormous value of an effective independent board capable of protecting and maximizing the interests of investors," says Don Seymour, managing director at DMS Management, a service provider and adviser to hedge funds. Independent directors are responsible for looking out for issues that arise within the fund, and addressing problems such as regulatory investigations. However, it is not that simple to find independent directors. Whether retired individuals or professional firms of several staff, Seymour says the key is to find directors with the ability "to understand and adapt to investor expectations as outlined in the fund documents and not arbitrary policies conceived in the director's mind. The potential negative effects of style drift of the investment manager are well understood in the industry but this also applies to directors, who can destroy investor value by imposing their will in a manner inconsistent with investor expectations."
