Demand for independent directors grows

Alan Tooker, Director of ARC
Directors Ltd

Monday,  March 13, 2006

As the hedge fund industry continues its extraordinary growth, and more financial institutions allocate assets to the industry, there is an increasing demand for independent directors of offshore hedge funds.

Frequently, directors have been supplied by administrators; legal council and auditors at little to no cost but were not truly independent from reviewing the performance of the fund. 

There have been many people within the industry who have said that some providers are directors of far too many hedge funds to properly supervise. 

Furthermore, with the growing awareness of the risks and exposures for providing directorship, many service providers have withdrawn from providing these services. Consequently, there are more companies that focus on independent director services, which are moving in to fill the vacuum according to Alan Tooker, Director of ARC Directors Ltd. 

“There are two companies in the Cayman Islands that do nothing but provide independent director services,” said Mr Tooker. “But there are more companies that are also adding it as part of their general business.” 

He added the demands on directors would only increase as hedge funds become more sophisticated and innovative. 

One concern is the increased use of side letters, which has gone hand in hand with the growth in the allocation of assets to hedge funds by institutional investors. This is a particular area where a conflict of interest may arise between the investment manager and the interests of the hedge fund. 

The independent director’s responsibility regarding side letters is that no particular shareholder or investor in the fund should be favoured. Consequently, the director must be responsible for examining the contents of side letters and seek legal advice independent of the investment manager, to make sure the terms do not prejudice the rights of other investors in the fund.

The director also needs to assess trading and counterparty risks. 

“Insolvency is one of the areas where a director, non-executive or not, can end up personally responsible for the liabilities of a fund company,” added Mr Tooker.

“So it is important, from the director’s own perspective, that he has the experience and willingness to look into the affairs of the hedge fund, including the appointment of service providers and counterparties, when conducting his due diligence.”

He said that directorship for a Segregated Portfolio Company (SPC), which has many and varied portfolios, may require far more time and attention than several directorships of straightforward fund structures with long-short trading strategies focussed on exchange-traded futures. 
Mr Tooker said that although CIMA does not require licenses for independent directors, it is a good idea to apply for one as it raises the standard within the industry. 

“The commitment and attitude of an independent director is important, particularly when difficulties arise in the management or administration of a fund,” he noted.

“A professional independent director will stay around when a fund is in difficulty, and there are tough decisions to be made. 

“In the past, the response of some independent directors has been to resign their positions at the first sign of trouble – to cut and run. This is neither helpful nor constructive from the point of view of the investors in the fund and the fund’s counterparties.”

He explained that it’s important for the director during the tough times.

“An independent director, with the appropriate skills and experience, should remain on the board of the fund to assist in a resolution of the difficulties, so helping to ensure that the investors in the fund are treated fairly and equitably,” said Mr Tooker.

shurna@caymannetnews.com

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