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Guide to Sound Practices for Hedge Fund Administrators

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Guide to Sound Practices for Hedge Fund Administrators Guide to Sound Practices for Hedge Fund Administrators September 2009 Table of Contents 1. START-UP PHASE .........................................................................................7 1.1 Liaising with Lawyers .............................................................................7 1.2 Prospectus Review ................................................................................8 1.3 Negotiating Agreements..........................................................................9 1.4 SLAs ............................................................................................... 10 1.5 Fund structuring................................................................................. 11 2. INTERACTION WITH INVESTORS ..................................................................... 13 2.1 Introduction to the role of the transfer agent ............................................. 13 3. NAV CALCULATION..................................................................................... 15 3.1 Trade Capture ................................................................................... 15 3.2 Security Valuation............................................................................... 16 3.3 Reconciliations .................................................................................. 17 3.4 Expense Calculation ............................................................................ 17 3.5 NAV Calculation and Reporting ............................................................... 18 4. COMPLETING THE SERVICE ........................................................................... 20 4.1 Custody Services ................................................................................ 20 4.2 Middle Office Services.......................................................................... 20 4.3 Banking and FX Services........................................................................ 22 4.3.1 Investor Transactions ................................................................. 22 4.3.2 Cash Collateral......................................................................... 22 4.3.3 Margin Calls............................................................................. 23 4.3.4 Dealing Cash Flow Forecasting ...................................................... 23 4.3.5 Cash Management/Treasury ......................................................... 23 4.3.6 Foreign Currency ...................................................................... 23 4.4 Tax Services...................................................................................... 24 4.4.1 United States........................................................................... 24 4.4.2 Germany ................................................................................ 26 4.5 Financial Statements ........................................................................... 26 5. SUPPORT AND REVIEW ................................................................................ 28 5.1 Relationship Management...................................................................... 28 5.2 Monitoring of the Restrictions placed on the Fund’s Activity............................ 28 5.3 Company Secretary ............................................................................. 28 5.4 Directors.......................................................................................... 30 5.5 Management Companies/General Partners ................................................. 30 Appendices Appendix 1 Working Group ............................................................................... 31 Appendix 2 Investor Services/Anti-Money Laundering ............................................... 32 Appendix 3 Performance Fee Equalisation ............................................................ 44 Appendix 4 Funds of Hedge Funds ...................................................................... 49 Appendix 5 AIMA’s Guide to Sound Practices for Hedge Fund Valuation ......................... 50 Appendix 6 Sample IFIA Pricing Policy Document .................................................... 53 Appendix 7 IFRS and Irish/UK GAAP- Impact on Valuation .......................................... 64 Appendix 8 About the Associations ..................................................................... 66 Guide to Sound Practices for Hedge Fund Administrators - 2 - Foreword The Guide to Sound Practices for Hedge Fund Administrators was originally published in September 2004 as a joint venture between the Alternative Investment Management Association (AIMA) and the Irish Funds Industry Association (IFIA). The Guide has now been revised to reflect various industry developments in areas such as valuations, tax and anti-money laundering (“AML” hereafter). In particular, the new Guide includes key extracts from the AIMA Guide to Sound Practices for Hedge Fund Valuation. The area of valuation has been one of the hottest topics in the investment funds industry and the recommendations outlined represent a significant step forward in providing a roadmap to industry professionals, and comfort to investors, in recommending governance, control and risk mitigation processes in this area. This Guide is not jurisdiction specific and is relevant to practitioners around the world. AIMA and IFIA would like to thank and congratulate the members and staff of both associations (listed in appendix 1), all of whom have volunteered their time and worked extremely hard to produce this Guide. Andrew Baker Gary Palmer Chief Executive Officer, AIMA Chief Executive, IFIA Disclaimer The Guide is not to be taken or treated as a substitute for specific advice, whether legal advice or otherwise. It does not seek to provide advice on any of the issues herein. The views expressed in this Guide do not necessarily represent the views of all of the participants of the Working Group. September 2009© The Alternative Investment Management Association Limited and The Irish Funds Industry Association, 2009 All rights reserved. No part of this publication may be reproduced in any material form (including photocopying or storing it in any medium by electronic means and whether or not transiently or incidentally to some other use of this publication) without written permission by both copyright holders except in accordance with the provisions of the Copyright, Designs and Patents Act 1988 or under the terms of a licence issued by the Copyright Licensing Agency. Application for permission for other use of copyright materials including permission to reproduce extracts in other published works shall be made to The Alternative Investment Management Association Limited and the Irish Funds Industry Association. Full acknowledgement to authors, publishers and source must be given. Warning: the doing of an unauthorised act in relation to copyright work may result in both a civil claim for damages and criminal prosecution. Guide to Sound Practices for Hedge Fund Administrators - 3 - Introduction This Guide discusses the main functions typically carried out by hedge fund administrators (“HFAs” hereafter), and describes the contribution made by HFAs to the overall management and administration of the hedge fund. Firstly, the Guide acknowledges that there is no international standard definition of the phrase “hedge fund”. There are many investment funds which operate using all of the main hedge fund characteristics and there are investment funds which are clearly long-only, pay no performance fee and are highly regulated, thereby displaying none of the classic hedge fund features. There is a large and growing grey area in the middle. This Guide, while produced with the hedge fund industry in mind, may also apply to other investment fund arenas and product types. The Guide seeks to identify and recommend sound practice in hedge fund administration although, as befits an industry the size of the hedge fund administration industry, there will be differences between practices described herein and practices employed by individual HFAs. In this respect, the Guide should not be seen as prescriptive or as a checklist defining what HFAs should or should not do. It is intended, however, to provide guidance to hedge funds, investors and other service providers as to how sound practice has emerged in the field of hedge fund administration. While the Guide acknowledges that the HFA has no formal role over the identification or prevention of fraudulent activity, the appointment of an HFA is strongly recommended as part of a governance framework that can provide assurances to investors that the fund is being managed in accordance with accepted best practice. The topics covered by this Guide are: 1 Start-Up Phase 2 Interaction with Investors 3 NAV Calculation 4 Completing the Service 5 Support and Review The Guide should be regarded as a general overview of the services typically provided by an HFA and not as a substitute for, or alternative to, professional advice. Except where specifically addressed, the Guide does not describe practices that conform to any single regulatory regime or domicile. It is intended to be neutral in this respect. The Guide aims to present a practical and user-friendly tool, rather than a textbook. The Guide can be obtained from the following web sites: www.aima.org www.irishfunds.ie Guide to Sound Practices for Hedge Fund Administrators - 4 - Executive Summary Since the release of the first Guide in 2004, the hedge fund industry has grown massively
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