In June 2010, Greg Robbins, general counsel for Mesirow Advanced Strategies, sent a letter to Yolanda McCoy, head of the investments and securities division at the Cayman Islands Monetary Authority. Robbins was seeking help with manager due diligence for Mesirow, a Chicago-based fund-of-hedge-funds firm. Namely, he wanted CIMA to publish information about the service providers and directors of Cayman-based hedge funds. A year later, Robbins is still waiting for answers.
When the financial crisis revealed gaps in the due diligence process for hedge funds — for example, directors unwilling or unable to speak to investors — $13.6 billion Mesirow and other firms strove to close them. But one prize remains elusive: the names and backgrounds of the folks who direct offshore hedge funds located in tax havens such as the Caymans.
Robbins will have to wait a bit longer, McCoy says. CIMA has started investigating disclosure in the broader context of Cayman fund governance, she explains, and that task is likely to take at least another year.
Mesirow’s counsel stresses that he’s not looking for new regulation. He only wants access to details like how many boards directors sit on, if they’ve had to call on their director and officer insurance, and how many funds they’ve gated. With that information, his firm could develop a list of credible directors.
Others share Robbins’s frustration. “We want to know: Who are these people? What other positions have they had?” says Steven Whittaker, lead author of the Offshore Alternative Fund Directors’ Guide, published by the London-based Alternative Investment Management Association. “We can’t get anything from CIMA,” adds Whittaker, an attorney at law firm Simmons & Simmons in London.
Hedge fund governance became a serious matter in the late 1990s, when managers began taking in billions from pension funds and university endowments. But institutions in search of bulletproof hedge fund operations haven’t been well served by the rise of offshore hedge funds, which are notoriously opaque. Most offshore shops are based in the Caymans; 9,261 were registered with CIMA as of March 31.
The call for greater fund transparency has grown louder since the recent crash. Partly reflecting due diligence worries, fund-of-hedge-fund assets plunged to $571 billion at the end of 2009 from a record $825.9 billion in mid-2008, according to Chicago-based Hedge Fund Research. As of January the total stood at $646 billion.
Critics say investors shouldn’t be complacent. Last year, Mike Powell, head of alternative investments at Universities Superannuation Scheme, a £30 billion ($48.9 billion) U.K.-based pension fund, wrote an op-ed in the Financial Times urging investors to insist upon interviewing at least one director of a prospective hedge fund. Powell also pushed investors to advocate for a database of directors in offshore jurisdictions. Noting the role of directors in erecting hedge fund gates, suspending redemptions and allowing side-pocket agreements — special terms negotiated between a manager and an investor — he argued that they often act in the interests of managers rather than investors.
Two big complaints leveled at hedge fund directors is that many have close ties to fund managers and that they take on hundreds of directorships. While a director can comfortably oversee 15 funds at the same firm, Mesirow’s Robbins says, sitting on the boards of 15 firms — never mind hundreds — is a much bigger oversight job. Kevin Ryan, founder of HedgeDirector, an Umbria, Italy–based provider of hedge fund directors, believes directors lose their effectiveness if they take on more than 20 to 30 firms.
One fund of hedge funds has found a way around director secrecy. At $10 billion Pacific Alternative Asset Management Co. in Irvine, California, two thirds of hedge fund investments are in separately managed accounts or “funds of one,” as head of investment operations Kevin Williams puts it. Paamco began this practice in 2005 because noncommingled funds give it more control. Of firms in which directors are in thrall to managers, Williams says, “You have a situation where the fox is guarding the henhouse.”