As the Asian fund management industry matures, we are seeing larger hedge fund firms emerging in the region that are seeking institutional mandates, not just from Asian investors but also further afield. Amongst global investors there continues to be an appetite for Asia hedge funds that are capable of providing consistent returns and exposure to the region's dynamic growth story.

Many Asian hedge funds are seeded by private capital, particularly from wealthy individuals and family offices. However, as these funds grow they increasingly find themselves in discussion with institutional investors with more demanding operational due diligence requirements, including stringent governance and oversight standards.

For some time now Carne has been tracking the increased demands of institutional investors for improved governance at the fund board level A few of the findings from Carne's 2011 survey of major institutional investors are particularly pertinent:

  • Investors rated governance levels on the boards of funds managed by Asia-based managers as only 5/10
  • 91% of investors say poor governance in a fund would cause them to avoid investing
  • 76% of investors have already chosen not to invest in at least one fund due to governance concerns
  • Investors consider Asia to be the toughest region from which to obtain details on fund directors, their backgrounds and their relationship to the investment manager of the fund
  • Investors favour independent directors with strong track records in the fund management industry and no commercial relationship to the fund's other service providers
  • Investors want to see the majority of directorships on a fund board held by independents – a token independent director is no longer satisfactory

The climate for hedge fund governance is changing in Asia. In Japan, the AIJ Investors scandal has shaken up the local pension funds industry. Following the disappearance of over $2 billion in pension assets, Japanese institutional investors are beefing up their own governance criteria. A recent J.P. Morgan survey of Japanese pension funds found that more than 60% are introducing measures to prevent future oversight failures of this type.

Elsewhere, all the indicators point to the fact that Asia-based hedge funds will need to address their governance arrangements. According to research by PricewaterhouseCoopers in Hong Kong, a significant percentage of its participants at its Asia Pacific Alternative Investment Funds Conference in November last year said they had increased the number of independent board directors and had upgraded the board agenda in the last three years.

Managers in Asia are already active users of offshore fund structures. For example, the Hong Kong Profits Tax Exemption for Offshore Funds sets forth guidelines that require central management and control of the offshore fund to be exercised outside the territory. It has meant that investment managers are already familiar with the idea of using an offshore fund structure in the Cayman Islands. A Cayman fund also represents an opportunity for local fund managers to address their governance arrangements by appointing experienced fund directors to the offshore fund board.

As larger Asian hedge funds begin to take on the dimensions of global players in the alternative investments business, it is critically important that they put in place the governance and oversight arrangements that will help them to succeed.

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