The Hedge Fund Matrix was launched in October 2008. Since that date, the PWG Asset Managers’ Committee (‘AMC’) has published its Final Report, “Best Practices for the Hedge Fund Industry” (January 2009) and the MFA has released the 2009 edition of its Sound Practices for Hedge Fund Managers.

Please be aware that the contents of Matrix incorporate the AMC’s Report of June 2008 and the 2007 edition of the MFA’s Sound Practices – the Matrix has not been updated to include any changes which the more recent documents referred to above might require and, consequently, caution should be used when referring to the columns within the Matrix which relate to the PWG and the MFA.

Filter the matrix

Filter by Provider

All

AIMA

HFSB

IOSCO

MFA

PWG

 

• Section A - Creating and Managing a Hedge Fund Business
  • 1. Management and Controls
    • 1. System & controls

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	1. Every Hedge Fund management business, whatever its size, should organise its internal affairs in a responsible manner, ensuring it has appropriate systems, procedures and controls designed to mitigate and manage the risks to which the business is subjected. This should be documented but the extent of documentation will vary depending on the complexity of the business operations. 2.  It is good business practice to attempt to segregate, amongst different personnel, duties which may be regarded as incompatible with each other.	View Guidance
      MFA Sound Practices for Hedge Fund Managers	1.  A Hedge Fund Manager should establish management policies and practices appropriate for its size, nature, and complexity and for its trading activities for each Hedge Fund it manages. 2. A Hedge Fund Manager should determine the investment, risk, and trading policies for each Hedge Fund it manages based on the specific investment objectives described in the respective Hedge Fund’s offering documents.	View Guidance
      PWG Asset Managers' Committee Report	1.  A Manager should develop a comprehensive and integrated framework to manage trading and business operations, taking into account the size and complexity of its activities, the nature of its investment, and the requirements of its investment strategy. 2.  The Manager should develop infrastructure and operational practices tailored to its business. Requirements for the infrastructure needed will vary depending on the types of investments, frequency of trading, and the need for manual processing, as opposed to the availability of automated systems.	View Guidance
    • 2. Business Risk Management

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	Management should implement a business risk management process to assess all the non - investment risks associated with the business, although the degree of formality of this process will vary widely dependent upon the regulatory environment and the size and complexity of the business.	View Guidance
      HFSB Hedge Fund Standards: Final Report	A hedge fund manager should ensure that material aspects of its operational procedures are adequately documented and training is provided to staff. This should include, among other things, areas such as compliance procedures, back-up/disaster recovery procedures, personal account dealing policies and client confidentiality. A hedge fund manager should also periodically test its compliance procedures or have them audited by an external party. [See also Section B2 (11)]	View Guidance
    • 3. Outsourcing

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	1.  Where key functions are outsourced, management must be satisfied as to the competency of the relevant service provider and should have a process in place to monitor and review work performed.  [See also Section E2 (2)] 2.  The firm should ensure that it undertakes suitably robust reviews of the third parties to provide itself with the assurance that they are performing the outsourced functions in accordance with their service level agreements. [See also Section E2 (2)]	View Guidance
      HFSB Hedge Fund Standards: Final Report	1.  A hedge fund manager should disclose the names of its principal third party service providers in its due diligence documents or upon request. [See also Section E2 (2)] 2.  A hedge fund manager should, to the extent it is able or permitted to do so, provide information on the fund’s committed funding or financing arrangements with prime brokers/lenders to investors in its due diligence documents or upon request. [See also Section D2 (1)]	View Guidance
      MFA Sound Practices for Hedge Fund Managers	A Hedge Fund Manager should have appropriate approval processes and documentation for retaining sub-advisers and other external portfolio managers.	View Guidance
      PWG Asset Managers' Committee Report	Senior management should not outsource risk monitoring or management, and must maintain responsibility for the overall risk framework. [See also Section B2 (1)]	View Guidance
  • 2. Finance
    • 1. Systems and Controls for Financial Information

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	Firms should ensure that they have appropriate systems and procedures capable of: developing relevant budgets; monitoring their financial resources position; producing timely and accurate management accounting and financial information; and providing necessary regulatory and statutory financial reports in the format that the jurisdiction requires. In the case of (i), budgets should be prepared annually and updated where significant changes occur in underlying assumptions. They should include monthly income, expenditure, cash and (if relevant) regulatory capital forecasts. Procedures in respect of the processes adopted for each of (i) to (iv) above should be documented and retained.	View Guidance
      PWG Asset Managers' Committee Report	1.  The Manager should have internal or external personnel with an appropriate level of accounting knowledge and experience. 2.  The Manager should have access to systems appropriate to the needs and complexities of the firm, capable of correctly recording the trading and non-trading activities of the funds from an accounting perspective.  3.  The Manager should implement a month-end close process (or if not monthly, then at least as often as required by the fund’s organizational documents). 4.  The Manager should implement an annual process to produce its annual financial statements and related footnotes, which will be audited by the fund’s independent accounting firm. 5.  The Manager should implement an annual process to produce investor level tax information, as needed by investors, in accordance with the regulations promulgated by the relevant taxing authority. 6.  The Manager should periodically assess its operational controls in light of the changing needs of its business, particularly where there have been changes to the activities of the organization.	View Guidance
    • 2. Financial Requirements and Resources

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	Management should have the appropriate knowledge and skills to monitor the financial resources position of the business and to complete relevant regulatory financial filings. Where relevant, a Hedge Fund manager should be capitalised so as to meet the minimum regulatory capital requirements with some contingency (most managers will have an excess of at least 10 – 20% over the amount that they are required to hold) to take account of future changes and unexpected developments.	View Guidance
      PWG Asset Managers' Committee Report	1.  The Manager should have a framework for managing its cash balances and processing any margin or collateral calls from its prime brokers, financing and OTC derivative counterparties. In developing this framework, Managers should carefully consider industry practices and developments in this area. 2.  The Manager should: understand and monitor its compliance with credit agreements; understand and monitor the amount of collateral required to support positions; verify marks used by the fund’s counterparties to value the fund’s positions for collateral purposes; and verify and meet margin calls in a timely manner.	View Guidance
  • 3. Compliance
    • 1. Regulatory Environment

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	1.  A Hedge Fund manager should ensure it takes reasonable steps to understand the regulatory environment within which it operates and the specific rules applicable to its business. The Hedge Fund manager should develop procedures to comply with these rules. The manager should additionally ensure that all staff are fully aware of the procedures and rules applicable to their particular area of work. 2.  Hedge Fund managers must be conscious of the regulatory restrictions that apply to promoting their services and marketing the Hedge Funds whose investments they manage. [See also Section D1 (1)]	View Guidance
      HFSB Hedge Fund Standards: Final Report	1.  A hedge fund manager should be confident that it understands the applicable laws and regulations in the markets in which it deals and has effective systems and controls in place to enable it to identify, assess, monitor and manage the risk that it is used to further financial crimes. [See also Section B2 (11)] 2.  A hedge fund manager should ensure that it understands local conduct of business rules and regulations which apply in the jurisdictions in which it operates (including any rules governing the passporting of regulatory authorisations from one jurisdiction to another). A hedge fund manager should also ensure that it understands laws and regulations relevant to the securities in which it trades (e.g., shareholding disclosure requirements and foreign ownership rules). [See also Section B2 (11)]	View Guidance
      MFA Sound Practices for Hedge Fund Managers	1.  A Hedge Fund Manager should create a management environment that fosters a culture of compliance and should devote adequate internal resources to compliance with all laws, rules and regulations applicable to its business operations and market conduct. 2.  The policies and procedures of a Hedge Fund Manager with regards to international operations or investment activity should be geared to comply with laws, rules and regulations in all jurisdictions in which it conducts trading activities or business. 3.  A Hedge Fund Manager should identify all required U.S. and international regulatory filings and clearly allocate responsibility for oversight of these filing obligations to appropriate personnel or service providers who will supervise and ensure timely compliance with applicable regulations and filing requirements. 4.  A Hedge Fund Manager should review its Business Continuity/Disaster Recovery plan to ensure it is consistent with applicable laws, rules and regulations. [See also Section C4 (2.b)]	View Guidance
      PWG Asset Managers' Committee Report	Managers should evaluate whether, and document how, each investor’s qualifications satisfy requisite legal standards appropriate to the structure of the fund, typically through subscription agreements. [See also Section E1 (1)]	View Guidance
    • 2. Prevention of Market Abuse

      Provider	Practice	Guidance
      HFSB Hedge Fund Standards: Final Report	1.  A hedge fund manager should ensure that it has internal compliance arrangements which are designed to identify, detect and prevent breaches of market abuse laws and regulations. 2. A hedge fund manager should disclose to investors in its own marketing materials that it has a policy to prevent market abuse (no disclosure of the actual policy is required). [See also Section D1 (1)]	View Guidance
    • 3. Relationship with Regulator

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	Where a Hedge Fund management business is regulated, managers should seek to retain an open and co-operative dialogue with their regulator either directly or through a trade association such as AIMA.	View Guidance
    • 4. Compliance Officer

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	The Hedge Fund manager should appoint a senior individual to take responsibility for compliance oversight. The Hedge Fund manager should ensure that this individual has sufficient time to dedicate to the task and that recurring tasks, such as record keeping and compliance monitoring, are completed on a timely basis. The individual appointed should be vested with the necessary authority to enforce compliance with relevant rules and internal procedures.	View Guidance
      HFSB Hedge Fund Standards: Final Report	1.  A hedge fund manager should appoint a compliance officer who is independent of the portfolio management function to oversee all issues relating to regulatory compliance and market and professional conduct. If a smaller or start-up manager considers it impractical to do so, it should disclose this in its marketing documents and do what it reasonably can to enable the fund governing body to disclose this in the fund's offering documents. The compliance officer should report regularly to the manager’s chief executive officer or management committee or equivalent. [See also Section B2 (11)]  2.  A hedge fund manager should provide to the fund governing body a report on regulatory compliance prepared by the compliance officer on a regular basis. [See also Section B2 (11)]	View Guidance
      MFA Sound Practices for Hedge Fund Managers	A Hedge Fund Manager’s senior management should be involved in the compliance program and appoint or hire an individual to develop and monitor compliance with all applicable laws, rules and regulations by the Hedge Fund Manager and the Hedge Funds it manages.	View Guidance
      PWG Asset Managers' Committee Report	1.  A Chief Compliance Officer or other member of senior management (as appropriate to the size, complexity and resources of the Manager), with sufficient knowledge and experience, should be appointed to oversee the Manager’s compliance program. 2.  The Chief Compliance Officer should have adequate resources to seek the advice of external experts on compliance matters when needed. This may be especially important where the Manager operates in international markets outside the location of the Manager. 3.  The Chief Compliance Officer should be able to devote sufficient time to the performance of his or her functions. 4.  The Chief Compliance Officer should have access to and report to senior management and should recommend appropriate disciplinary action to senior management.	View Guidance
    • 5. Compliance Procedures and Records

      Provider	Practice	Guidance
      MFA Sound Practices for Hedge Fund Managers	1.  A Hedge Fund Manager should establish written compliance policies and procedures that comprehensively address all applicable laws, tailored to its specific business operations. 2.  As part of its written compliance policies and procedures, a Hedge Fund Manager should include a code of ethics specifically designed for its business operations. The code should set standards of professional conduct for its personnel consistent with the Hedge Fund Manager’s fiduciary duties and other applicable laws. The code should also include procedures for handling material, non-public information to the extent relevant and applicable. 3.  As part of its compliance program, a Hedge Fund Manager should develop document retention policies and procedures and create and retain required books and records related to business operations.	View Guidance
      PWG Asset Managers' Committee Report	1.  A Manager should establish a comprehensive and integrated compliance and business practices framework that is supported by adequate resources. 2.  The Manager should develop and adopt a written code of ethics that establishes guidelines that are designed to foster integrity and professionalism among the Manager and its personnel. Whether particular policies or subjects are addressed in the code of ethics or compliance manual should be determined by the Manager taking into account what it believes is most effective for its business. 3.  The Manager should evaluate the critical elements to be addressed in its compliance manual in light of the focus of its business and operations. 4.  The Manager should develop a written compliance manual that outlines its policies and procedures for complying with laws, rules and regulations (domestic or international) applicable to the fund’s business operations and trading activities. 5.  Business records that are important to the Manager and fund should be maintained. 6.  The Manager should establish policies and procedures for the creation, maintenance and retention of business records that are appropriate to its size and level of activity. 7.  The Manager should establish and devote adequate resources to a compliance function to oversee, implement and review the Manager’s compliance program. 8.  The Manager should establish a robust training program to educate personnel in respect of its compliance program. [See also Section A4 (2)]	View Guidance
    • 6. Monitoring and Review

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	1.  The Hedge Fund manager should implement arrangements for the regular monitoring of business risks and for adherence to all compliance requirements. 2.  The results of monitoring should be documented and communicated to management. Procedures should be in place to ensure that where weaknesses have been identified, these are promptly resolved, as well as processes to ensure that changes in regulation are assessed and properly implemented.	View Guidance
      MFA Sound Practices for Hedge Fund Managers	A Hedge Fund Manager should regularly review and update its compliance policies and procedures and should establish internal controls to monitor compliance.	View Guidance
      PWG Asset Managers' Committee Report	1.  The Manager should establish a system to monitor compliance with its compliance policies and procedures. 2.  Non-compliance with the policies or procedures described in the various parts of the compliance framework should be reviewed and handled promptly and conclusively. 3.  The Manager’s compliance framework, including compliance policies and procedures, should be reviewed at least annually to assess its effectiveness. A more frequent review of aspects of the compliance framework is appropriate upon the occurrence of events that necessitate more immediate changes.	View Guidance
  • 4. Employees
    • 1. Recruitment

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	In order to ensure the suitability of new employees, the manager should have in place appropriate recruitment procedures.	View Guidance
    • 2. Training

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	1.  Management should be committed to ensuring that employees: have the requisite level of knowledge and experience for the tasks they are undertaking; are and remain competent for the work they undertake; and are appropriately supervised and that their competence is regularly reviewed. Senior management should be aware of the dependence which can be placed upon key individuals in a small team and seek to mitigate the risks involved if one of these key individuals leaves (or is otherwise not available to) the Hedge Fund manager. 2.  Hedge Fund managers should remain alert to the need for continued training and development of employees, particularly in rapidly changing investment environments or in cases where employees are changing or undertaking new roles.	View Guidance
      MFA Sound Practices for Hedge Fund Managers	A Hedge Fund Manager should adequately train all personnel to be familiar and comply with its compliance policies and procedures.	View Guidance
      PWG Asset Managers' Committee Report	1.  Depending on the size and complexity of the organization, the Manager should endeavour to cross-train personnel or otherwise have appropriate back-up, so that key operations functions are not dependent solely on one individual. [See also Section B2 (11)] 2.  The Manager should regularly assess the appropriate level of staffing and resources for complex or unique trading strategies from an operational and business risk perspective and be willing to maintain that level. [See also Section B2 (11)] 3.  The Manager should establish a robust training program to educate personnel in respect of its compliance program. [See also Section A3 (5)]	View Guidance
• Section B - Investment Process and Portfolio Risk Management
  • 1. Investment Process
    • 1. Conduct

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	Hedge Fund managers should conduct themselves in a manner which a reasonable market participant would deem prudent, honest and reputable.	View Guidance
      MFA Sound Practices for Hedge Fund Managers	1.  A Hedge Fund Manager should foster a management environment that appropriately recognizes its responsibility to act in the interest of each Hedge Fund it manages. 2.  A Hedge Fund Manager should establish policies and procedures designed to: safeguard information related to its Hedge Fund trading activities, as well as information subject to confidentiality obligations, and prevent the misuse of this information (including investor or customer information), taking into account the nature of the Hedge Fund Manager’s business and type of investments or instruments traded.	View Guidance
      PWG Asset Managers' Committee Report	Maintaining high ethical standards of integrity in the Manager’s business must be the responsibility of senior management and each employee.	View Guidance
    • 2. Investment Strategy

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	1.  The investment strategy to be applied by the Hedge Fund manager must be clearly documented and understood by those executing it. The investment strategy should also be disclosed to investors. 2.  The Hedge Fund manager should be satisfied that the service providers have the requisite level of expertise and technology to deliver the services required to support the investment strategy and investor base effectively. [See also Section E2 (1)]	View Guidance
      AIMA Offshore Alternative Fund Directors' Guide	The Board is responsible to the shareholders for ensuring that the Fund adheres to its investment objectives and restrictions. [See also Section E1 (5.c)]	View Guidance
      HFSB Hedge Fund Standards: Final Report	1.  A hedge fund manager should carefully consider the appropriate mechanism, given the nature of potential investors, for changing the fund’s stated investment policy/strategy and advise the fund governing body accordingly. 2.  Once the fund governing body has determined the appropriate mechanism, the manager should do what it reasonably can to enable and encourage the fund governing body to disclose such mechanism appropriately in the fund’s offering documents.	View Guidance
    • 3. Investment Decision-making Process

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	A Hedge Fund manager should have a defined investment decision-making process.	View Guidance
    • 4. Explanation of Investment Process to Investors

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	Any explanation of the investment process to investors or potential investors should accurately represent what happens in practice and be broadly adhered to thereafter.	View Guidance
    • 5. Review of Process

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	The process should be reviewed and updated regularly. Employees of the Hedge Fund manager should also understand the investment process and their role in it.	View Guidance
    • 6. Conformity with Investment Strategy/Hedge Fund Mandate

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	Hedge Fund managers should assess and evaluate their appetite for risk with respect to the given investment strategy. Furthermore, the Hedge Fund manager should ensure that it makes investment decisions within the parameters of the Hedge Fund’s mandate.	View Guidance
      AIMA Offshore Alternative Fund Directors' Guide	The Directors should ask the Fund’s Investment Manager or Administrator to produce a report on the Fund’s compliance with its stated investment policies and restrictions for consideration at each Board meeting. [See also Section E1 (1)]	View Guidance
      HFSB Hedge Fund Standards: Final Report	A hedge fund manager should track a fund’s adherence to its stated investment objectives, investment policy/strategy and investment and other restrictions and take appropriate corrective action if a breach of investment policy/strategy or of any restrictions or limits occurs.	View Guidance
      MFA Sound Practices for Hedge Fund Managers	1.  A Hedge Fund Manager should impose appropriate controls to ensure that its portfolio management and trading activities are consistent with the allocation policies and trading parameters. 2.  A Hedge Fund Manager should establish policies for monitoring the trading activities and performance of each portfolio manager to which it allocates capital.	View Guidance
    • 7. Investment in Non-listed Instruments

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	If Hedge Fund managers intend to invest in non-listed instruments (which can result in sudden and significant losses) they should: inform investors of their intentions, typically in a Hedge Fund’s marketing material and/or in the offering document ensuring that all necessary legal documentation is clear that the Hedge Fund may enter into such contracts and transactions; possess the necessary expertise and experience properly to understand the factors which will change the risk profile or pricing of the instruments; ensure there are rigorous controls over entering into, documenting and collateralising the instruments; fully understand the impact of any warranties and liabilities contained in the documentation, and have a process to monitor and record these where applicable; ensure they understand any legal documentation governing or defining the nature of the instruments and the terms of their clearance, settlement and close out before signing the documents. If managers do not have access to adequate in-house resources, reference should be made to expert legal advisers; and consider using independent price providers.	View Guidance
      PWG Asset Managers' Committee Report	1.  Bank Loans – The Manager should assess whether it has the appropriate systems and personnel to manage the extended settlement cycles and unique features of these products. 2.  Mortgaged Backed Securities/CMOs – The Manager should assess whether it has appropriate systems and personnel to manage the unique features of these products, such as processing monthly paydowns and understanding payment waterfalls. 3.  Structured Credit Trading – The Manager should assess whether it has the appropriate systems and personnel necessary to manage the unique features of these products, such as the financing component, waterfall structures and correlations. 4.  Private Transactions – The Manager should assess whether it has appropriate resources such as internal and external legal, tax and structuring expertise that is adequate to support these transactions. 5.  Transactions in Foreign Markets – These types of transactions require an understanding by personnel or service providers of local regulatory, market and tax infrastructure and settlement conventions.	View Guidance
    • 8. Best Execution

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	The Hedge Fund manager should have a written policy, which should include a process regularly to review trading activity, including counterparties, in order to monitor that it is achieving its best execution objectives and complying with relevant regulatory requirements.	View Guidance
      MFA Sound Practices for Hedge Fund Managers	1.  A Hedge Fund Manager should seek best execution in its trading activities for the benefit of the Hedge Funds it manages. 2.  As part of its compliance policies and procedures, a Hedge Fund Manager should periodically review the firm’s relationship with each counterparty executing transactions on behalf of every Hedge Fund it manages to assess whether the counterparty continues to provide best execution.	View Guidance
    • 9. Fair Allocation of Trades

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	The fair allocation of trades amongst portfolios should be an overriding principle of business both at the time of trade and at regular valuation points.	View Guidance
      MFA Sound Practices for Hedge Fund Managers	1.  A Hedge Fund Manager should develop and maintain trade allocation policies, disclose the material aspects of these policies to its Hedge Fund investors, and document any material deviations therefrom. 2.  A Hedge Fund Manager should include the material aspects of its trade allocation policies in a Hedge Fund’s offering documents and, with respect to a U.S.-registered investment adviser, in the Hedge Fund Manager’s Form ADV that is filed with the SEC.	View Guidance
    • 10. Inducements and Soft Commission

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	1.  Care should be taken to ensure that inducements do not create unacceptable conflicts of interest or influence the Hedge Fund manager to put its own interests before those of its clients or to act otherwise than in the best interest of its clients. 2.  Any other forms of inducement, given to or received by Hedge Fund managers or their employees, should be monitored to ensure they are appropriate in the circumstances and not likely to unduly influence the judgment of the recipient.	View Guidance
      MFA Sound Practices for Hedge Fund Managers	1.  Because Soft Dollar Arrangements may impact the evaluation of best execution, a Hedge Fund Manager, if applicable to its operations and trading activities, should make determinations regarding its Soft Dollar Arrangements and should develop policies relating to the use of these arrangements. 2.  A Hedge Fund Manager should evaluate the types of products and services subject to its Soft Dollar Arrangements. 3.  A Hedge Fund Manager should disclose its use of Soft Dollar Arrangements to existing and potential investors in each Hedge Fund it manages. This disclosure should be made prior to engaging in such arrangements and should disclose the Hedge Fund Manager’s policies with respect to these arrangements. 4.  A Hedge Fund Manager should establish and maintain policies relating to gifts and entertainment, and other payment or receipt of money or property from any person in a non-business capacity that may create the appearance of impropriety to Hedge Fund investors.	View Guidance
    • 11. Conflicts of interest

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	1.  The Hedge Fund manager should be aware that potential conflicts of interest might exist or develop from many sources, including formal or informal discussions, activities in the market and other business activities. Where they do exist or develop, the Hedge Fund manager should ensure it has policies and procedures in place for identifying such potential conflicts of interest. Any such potential or actual conflicts of interest should be kept under regular review by the senior management of the Hedge Fund manager and by those people responsible for the compliance function. 2.  The Hedge Fund manager should ensure such conflicts are either appropriately managed or eliminated and, to the extent not eliminated, disclosed to the relevant parties. The Hedge Fund manager should also ensure that adequate steps are taken to control internal communication of information about potential or actual conflicts of interest in order for such conflicts of interest to be dealt with appropriately.	View Guidance
      HFSB Hedge Fund Standards: Final Report	1.  In areas where potential conflicts of interest could arise (valuation, risk management, compliance), a hedge fund manager should clearly divide these activities from the portfolio management function with separate reporting lines into the manager's chief executive officer or chief investment officer or similar. If a smaller or start-up manager considers it impractical to do so, it should disclose this in its marketing documents and do what it reasonably can to enable the fund governing body to disclose this in the fund's offering documents. [See also Section B2 (11)] 2.  A hedge fund manager's staff remuneration should not set false incentives (e.g., by linking the compensation of the valuation team directly to fund performance). [See also Section B2 (11)] 3.  A hedge fund manager should disclose the nature of any special commercial terms with its third party service providers which result in potential conflicts of interest (e.g., in-house brokerage or rebates).	View Guidance
      MFA Sound Practices for Hedge Fund Managers	1.  A Hedge Fund Manager should assess whether its operations or particular circumstances may present actual or potential conflicts of interest and should attempt to appropriately disclose any material conflicts of interest to Hedge Fund investors. 2.  A Hedge Fund Manager should disclose to Hedge Fund investors its relationships with prime brokers and other brokers that involve potential material conflicts of interest and, taking into account the nature of the Hedge Fund Manager’s business and type of investments or instruments traded, develop the appropriate policies and procedures. [See also Section D2 (1)]	View Guidance
      PWG Asset Managers' Committee Report	1.  The key to appropriately handling conflicts is to have a process in place for identifying them and addressing them. 2.  The Manager should adopt policies and procedures to identify and address potential conflicts of interest that may arise in its specific businesses. Whenever a conflict can be mitigated or addressed in a consistent and standardized way (such as in relation to personal trading policies), the Manager should adopt policies and procedures to deal with that conflict. 3.  Recognizing that circumstances may require a review of specific facts and that not all potential conflicts can be predicted, the Manager should also establish a Conflicts Committee.	View Guidance
    • 12. Personal Account Dealing

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	The Hedge Fund manager should adopt a personal account dealing policy that ensures that conflicts of interest between staff and clients are effectively managed.	View Guidance
      MFA Sound Practices for Hedge Fund Managers	A Hedge Fund Manager should develop and maintain a code of ethics and personal trading policies that include the appropriate use of material, non-public information. A Hedge Fund Manager should communicate the material aspects of this code and policies to Hedge Fund investors. [See also Section D2 (1)]	View Guidance
    • 13. Proxy Voting

      Provider	Practice	Guidance
      HFSB Hedge Fund Standards: Final Report	1.  A hedge fund manager should have a proxy voting policy which allows investors to evaluate the general approach the manager takes towards proxy voting. A summary thereof should be made available to investee companies on request. 2.  A hedge fund manager's proxy voting policy should be made available to investors upon request. A hedge fund manager should also document cases where the voting policy has not been followed and report accordingly to the fund governing body.	View Guidance
    • 14. Stock Borrowing

      Provider	Practice	Guidance
      HFSB Hedge Fund Standards: Final Report	A hedge fund manager should not borrow stock in order to vote.	View Guidance
    • 15. OTC Derivatives

      Provider	Practice	Guidance
      HFSB Hedge Fund Standards: Final Report	No relevant standard yet published.	View Guidance
      PWG Asset Managers' Committee Report	1.  If a Manager undertakes material trading activities in the OTC derivatives market or other more complex markets (such as bank debt, mortgage backed securities, equity derivatives, structured credit trading or private transactions), the Manager should devote the resources necessary to maintain infrastructure, personnel and processes that are sufficiently robust to handle the added complexities of these instruments and markets, including working closely with counterparties and remaining informed of, and responsive to, overall market trends. 2.  A Manager who trades in complex products should consider the need to maintain additional systems or to hire or engage personnel with specific skill sets necessary to appropriately manage such complex products. 3.  When trading in OTC derivatives, the Manager should consider the need for the following: negotiating appropriate ISDA master agreements with all of its OTC derivatives counterparties; negotiating bilateral collateral agreements with its counterparties whenever possible; appropriate systems to record all material terms of all OTC contracts to facilitate the appropriate pricing and risk management of these portfolios; processes to monitor and promptly report-up the resolution of any derivative transaction not supported by a counterparty term sheet detailing the economics of the trade; procedures for monitoring outstanding confirmations (e.g., not yet received, in review, disputed, or aged) and performing risk analysis, timely mitigation (e.g., prioritization) and expeditious resolution of outstanding confirmations; review of counterparty OTC margin calls and a process for assessing when the Manager should make its own OTC margin calls to brokers, as appropriate; appropriate processes and procedures to facilitate the Manager’s ability to adhere to the industry’s novation protocol and transaction processing timelines, and other industry protocols that may develop; and review of final payoffs for complex derivatives.	View Guidance
  • 2. Portfolio Risk Management
    • 1. Risk Management Process

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	1.  There should be a defined risk management process in place, which is both realistic and is regularly used by the Hedge Fund manager to enhance performance in addition to monitoring and managing risk. 2.  A risk management process should deal with both normal and exceptional conditions.	View Guidance
      HFSB Hedge Fund Standards: Final Report	1.  A hedge fund manager should put in place a risk framework which sets out the governance structure for its risk management activities and specifies the respective reporting lines, responsibilities and control mechanisms intended to ensure that risks remain within the manager’s risk tolerance as conveyed to and discussed with the fund governing body. 2.  The framework should cover all relevant categories of risk including portfolio, operational and outsourcing risks. 3.  A hedge fund manager should explain its approach to managing risk (its risk framework) to the fund governing body and do what it reasonably can to enable and encourage the fund governing body to explain, to the appropriate extent, such risk framework in the fund’s offering documents. 4.  A hedge fund manager should put in place a written Risk Policy Document, a copy of which should be supplied to the fund governing body. This document should set out the responsibilities of and procedures to be employed by the Hedge Fund manager's risk monitoring function. 5.  A hedge fund manager should ensure that adequate risk management processes and resources are available and well understood by portfolio managers, traders, risk managers, senior staff and other staff related to the management of the portfolio. A hedge fund manager should also discuss these risk management processes with the fund governing body and do what it reasonably can to assist the members of the fund governing body to understand such processes.	View Guidance
      MFA Sound Practices for Hedge Fund Managers	1.  A Hedge Fund Manager should have a risk measurement process appropriate to its size, complexity and portfolio structure. 2.  A Hedge Fund Manager should have a risk management process appropriate to its size, complexity, and portfolio structure. 3.  A Hedge Fund Manager should establish contingency plans for responding to the failure of a third-party fund administrator, credit provider, or other mission-critical party that would affect a Hedge Fund’s market, credit or liquidity risk. [See also Section C4 (2.d)]	View Guidance
      PWG Asset Managers' Committee Report	1.  A Manager should establish a comprehensive and integrated risk management framework that is suited to the size, portfolio management process and investment strategies of its funds. 2.  The risk management framework should be communicated to investors to enable them to assess whether the fund’s risk profile is appropriate for them and how the investment is performing against that profile. 3.  Senior management should determine the overall risk profile for the fund. 4.  The Manager should identify risks and determine how it intends to manage these risks to meet the fund’s risk profile. 5.  The Manager should develop a risk management process designed to measure and monitor the risks and enable investors to make informed decisions about the risk profile of the fund and its fit within their own risk tolerance. 6.  A member of senior management, such as a Chief Risk Officer or person with similar responsibilities, or a Risk Committee, should establish risk measurement criteria and implement a process to monitor the portfolio’s risk profile. 7.  As risk management is a subjective process, the Manager should understand the biases and limitations of its chosen risk measurement methodologies (including models) and adjust for these in measuring and making decisions about risk. 8.  Risk reports describing the portfolio’s exposures to the key risks identified by the Manager should be prepared and distributed to senior management responsible for the portfolio with a frequency appropriate to the nature of the portfolio. 9.  Senior management should appoint knowledgeable personnel to supervise risk analysis, measurement and monitoring and to take responsibility for the creation of policies and procedures covering all areas of risk management. 10.  The Chief Risk Officer (or other person with similar responsibilities) should have open access to and engage in regular dialogue with the portfolio managers as well as the fund’s senior management, so that he/she can acquire a clear understanding of the fund’s positions and strategies. 11.  Senior management should not outsource risk monitoring or management, and must maintain responsibility for the overall risk framework. [See also Section A1 (3)] 12.  Within the Manager’s risk management framework, the Manager should consider what categories of risk are material to the fund and adopt risk management measures most appropriate to its investment approach.	View Guidance
    • 2. Identification of Sources of Risk in Investment Strategy

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	1.  Hedge Fund managers should identify and understand the sources of risks inherent in their investment styles or processes. As far as is possible these risks should be translated into relevant, measurable risk factors. 2.  Hedge Fund managers should: seek to identify each major category of market risk and regularly attempt to measure and manage these risks both individually and together; be aware that there are many methodologies for measuring market risks and that these methodologies may produce widely different results; and seek to manage the risk exposures of the portfolio within pre-defined internal and/or external guidelines. Excesses should be identified and corrected as soon as possible either through hedging or position reduction.	View Guidance
      PWG Asset Managers' Committee Report	Through the risk management framework, the Manager should identify the risks inherent in its chosen investment strategies, and measure and monitor its exposure to these risks to be consistent with the Manager’s intended risk profile.	View Guidance
    • 3. Documenting Investment Restrictions

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	Hedge Fund managers should define their attitude towards risk by documenting investment restrictions.	View Guidance
    • 4. Monitoring Risk

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	1.  Hedge Fund managers should monitor risk on a regular basis. 2.  Hedge Fund managers should adapt the frequency of their risk monitoring to the needs of the portfolio. 3.  Hedge Fund managers should ensure the integrity of the risk monitoring function. Where practical, the manager should aim to segregate the risk monitoring function from the investment management function with different people responsible for each. 4.  Hedge Fund managers should reconsider the overall risk management process from time to time to make sure that it remains suitable for the investment strategy and current portfolio.	View Guidance
      HFSB Hedge Fund Standards: Final Report	1.  Potential conflicts of interests in the risk monitoring process should be managed by clearly separating the risk monitoring function from portfolio management. If a smaller or start-up manager considers it impractical to do so, it should disclose this in its marketing documents and do what it reasonably can to enable and encourage the fund governing body to disclose this in the fund's offering documents. 2.  Risk monitoring reports should be made to the person or body which has ultimate responsibility for risk management (such as the manager’s chief investment officer, chief executive officer or management committee).	View Guidance
      MFA Sound Practices for Hedge Fund Managers	1.  A Hedge Fund Manager should have a risk monitoring process appropriate to its size, complexity and portfolio structure. 2.  A Hedge Fund Manager should establish policies for determining when risk monitoring valuation methods may differ from NAV for operational or risk analysis reasons.	View Guidance
      PWG Asset Managers' Committee Report	1.  Where possible, material risks taken by the fund should be quantified and monitored at a frequency appropriate to the characteristics of the fund’s portfolio. Those material risks which are not quantifiable or measurable should still be monitored. 2.  The portfolio should be reviewed on a periodic basis (the frequency of this review depending on factors such as the nature of the portfolio and market conditions). This review should qualitatively assess whether the portfolio is performing consistently with expectations (based on the identified and measured risks) and, when it varies, review the factors that might be affecting the portfolio.	View Guidance
    • 5. Stress Testing

      Provider	Practice	Guidance
      HFSB Hedge Fund Standards: Final Report	1.  A hedge fund manager should conduct regular stress testing/scenario analysis to assess the impact of extreme market occurrences on the value of the portfolio. 2.  A hedge fund manager should account for valuation sensitivities under stressed conditions in its approach to risk measurement (e.g., VaR, stress testing/scenario analysis).	View Guidance
      MFA Sound Practices for Hedge Fund Managers	A Hedge Fund Manager should perform “stress tests” to determine how potential large changes in market prices and other risk factors could affect a Hedge Fund’s value.	View Guidance
    • 6. Escalation Procedures

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	The risk manager should have clear and robust reporting lines to senior management which will facilitate escalation of positions or trades which present risk in excess of pre-agreed parameters.	View Guidance
    • 7. Leverage Risk

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	1.  Hedge Fund managers should define the way they measure leverage, which should be monitored regularly. 2.  The maximum amount of leverage which can be employed may be constrained by such things as contractual terms and the suppliers of finance. Managers should ensure leverage remains within any such constraints. 3.  The maximum level of intended leverage should be disclosed to investors. [see also Section D2 (1)]	View Guidance
      MFA Sound Practices for Hedge Fund Managers	A Hedge Fund Manager should monitor leverage by considering metrics of financial statement-based leverage and metrics of risk-based leverage.	View Guidance
      PWG Asset Managers' Committee Report	1.  The Manager should manage its use of leverage to match the risk profile established for the fund based on its size, portfolio structure and specific investment strategies. 2.  The Manager should monitor changes in this measure over time as part of its risk management framework, and should take account of on- and off-balance sheet assets (e.g., derivative instruments, including OTC derivatives) in measuring leverage. 3.  The Manager should monitor leverage with a frequency appropriate to the characteristics of the underlying portfolio taking into account the potential impact of various inter-related factors such as: asset types, sectors and positions; overall liquidity profile of the portfolio; trading strategies employed by the Manager; volatility of assets and trading strategies; and the crowdedness/concentration of trading strategies. 4.  The Manager should thoroughly understand the terms on which prime brokers, lenders and other trading counterparties provide leverage to the fund and seek sustainable credit, margin and funding terms in order to manage its leverage prudently and minimize additional stress when market conditions become volatile. Important terms may include constraints on the portfolios (e.g., concentration, diversification and liquidity limits) and prime brokers’ and counterparties’ rights to alter these terms. 5.  The Manager should take into account the impact of employing leverage on any positions with embedded leverage, such as certain types of derivatives and other structured products.	View Guidance
    • 8. Liquidity Risk

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	1.  The liquidity of both individual positions and the overall portfolio should be actively monitored, particularly focusing on average daily trading volume and the concentration of positions within the portfolio. 2.  Market liquidity (i.e., capacity to trade assets) is usually an important risk factor and, therefore, the following should be measured and monitored: funding liquidity (i.e., available sources of finance to fund positions and redemptions) is a significant risk, highly correlated with other risks. The portfolio’s cash requirements should be monitored against available sources of finance. Usually, prime brokers are the major providers of financing and their financing policies should be understood and monitored both in normal conditions and periods of stress; and position, portfolio, market and funding liquidity should be managed by having proper monitoring procedures. These procedures should be fully documented to deal with normal conditions as well as periods of stress.	View Guidance
      HFSB Hedge Fund Standards: Final Report	1.  A hedge fund manager should develop a liquidity management framework, the primary role of which is to limit the risk that the liquidity profile of the fund’s investments does not align with the fund’s obligations. 2.  A hedge fund manager should regularly conduct stress testing and scenario analysis of the fund’s liquidity position.	View Guidance
      MFA Sound Practices for Hedge Fund Managers	1.  A Hedge Fund Manager should understand the liquidity characteristics of the various assets in the portfolios of the Hedge Funds that it manages. 2.  A Hedge Fund Manager should monitor and manage current and expected future sources of and draws on liquidity (cash). 3.  A Hedge Fund Manager should plan for potential periods of funding liquidity stress characterized by a sharp rise in needed cash relative to available cash.	View Guidance
      PWG Asset Managers' Committee Report	1.  The Manager should seek to increase the stability of external factors affecting the portfolio through prudent agreements with lenders and investors. 2.  The Manager should thoroughly understand and regularly review the material terms in its credit and lending agreements, including the interaction of those terms, cross-default and cross-collateralization provisions, and their impact on collateral management and requirements. 3.  The Manager should consider regularly conducting liquidity stress scenario analyses on the portfolio(s) in order to understand and better manage its ability to meet obligations in light of the fund’s portfolio.	View Guidance
    • 9. Counterparty Risk

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	1.  Creditworthiness or solvency of a counterparty can become a risk particularly when there are significant unexpected changes. Because this risk is usually not hedged, managers should be aware that this may become a source of risk. 2.  The Hedge Fund manager should have defined procedures for establishing relationships with new counterparties, undertaking a high level review of the quality of the counterparty, credit reviews and for maintaining the necessary documentation. Prime brokers and swap counterparties should be considered as significant counterparties.	View Guidance
      HFSB Hedge Fund Standards: Final Report	1.  A hedge fund manager should have a process for setting up trading relationships on behalf of the fund, including the assessment of creditworthiness and the setting of risk limits. 2.  Creditworthiness of the fund's trading counterparties should be monitored periodically and risk limits adjusted if required.	View Guidance
      MFA Sound Practices for Hedge Fund Managers	1.  To enhance the stability of financing and trading relationships, a Hedge Fund Manager should maintain an open dialogue with its credit providers and counterparties with respect to credit terms and conditions, including the extent of financial and risk information to be provided to such parties. 2.  A Hedge Fund Manager should understand and manage its exposure to potential defaults by trading counterparties.	View Guidance
      PWG Asset Managers' Committee Report	1.  The Manager should monitor its fund’s exposure to counterparty credit risk (including, as applicable, prime brokers, derivatives dealers and lending, trading, cash management and depositor counterparties) and understand the impact of potential counterparty loss of liquidity or failure. 2.  The Manager should assess creditworthiness when selecting and transacting with counterparties (recognizing that subsidiaries and affiliates of counterparties may have different creditworthiness than parent companies). 3.  The Manager should understand the complexity of the legal relationships a fund may have with its prime brokers and any other significant lending or derivatives counterparties and their affiliates. 4.  The Manager should measure and monitor its credit exposure to each counterparty (as appropriate given the level of the fund’s exposure to each counterparty). 5.  The Manager should dedicate appropriate resources to manage its collateral movements and, where possible, aim to reduce mismatches at a counterparty (e.g., by maintaining reasonably hedged portfolios at each prime broker). 6.  To minimize risk in the event of market stress, the Manager should consider taking steps to increase its access to liquidity, such as opening cash and custody accounts at financial institutions other than its prime brokers.	View Guidance
    • 10. Market Risk

      Provider	Practice	Guidance
      HFSB Hedge Fund Standards: Final Report	1.  A hedge fund manager should develop measures to identify market risk in the fund’s portfolio. To overcome the shortcomings of individual measures, the Hedge Fund manager should rely on multiple techniques. 2.  A hedge fund manager should translate the results of the analysis of market risks (stress tests/scenario analysis, etc) into timely management action (e.g., adjustment of positions) as part of the control and risk management process.	View Guidance
      MFA Sound Practices for Hedge Fund Managers	1.  A Hedge Fund Manager should have controls to protect the integrity of information used in its risk measurement, monitoring and management processes. 2.  A Hedge Fund Manager should measure quantifiable, position-level market risk exposures on a reasonably consistent basis across the various portfolios and trading positions of the Hedge Funds it manages. 3.  A Hedge Fund Manager should calculate, report, and review aggregations of position-level market risk metrics along dimensions that highlight major aspects of a Hedge Fund’s market risk exposure. 4.  A Hedge Fund Manager should calculate, report and review volatility metrics for portfolios and, if appropriate, relevant sub-portfolios. 5.  A Hedge Fund Manager should be aware of limitations of the metrics and models that it uses in its market risk measurement, monitoring, and management processes.	View Guidance
      PWG Asset Managers' Committee Report	1.  The Manager should regularly evaluate market risk, incorporating some or all of the risk measures set out in the accompanying guidance, as applicable to the fund’s size and portfolio management processes and the complexity of its investment strategies. 2.  It is important to periodically review the performance of models used to measure and monitor market risk and adjust as appropriate to maximize effectiveness. 3.  Changes to models and assumptions should be made to factor in new data and to account for previously unrecognized relationships or risk factors. 4.  Managers should understand the limitations inherent in risk models, such as assumptions in the inputs and limitations of historical data. They should use results from these risk models after quantitatively taking into account these limitations.	View Guidance
    • 11. Operational Risk

      Provider	Practice	Guidance
      HFSB Hedge Fund Standards: Final Report	1.  In areas where potential conflicts of interest could arise (valuation, risk management, compliance), a hedge fund manager should clearly divide these activities from the portfolio management function with separate reporting lines into the manager's chief executive officer or chief investment officer or similar. If a smaller or start-up manager considers it impractical to do so, it should disclose this in its marketing documents and do what it reasonably can to enable the fund governing body to disclose this in the fund's offering documents. [See also Section B1 (11)] 2.  A hedge fund manager's staff remuneration should not set false incentives (e.g., by linking the compensation of the valuation team directly to fund performance). [See also Section B1 (11)] 3.  A hedge fund manager should ensure that material aspects of its operational procedures are adequately documented and training is provided to staff. This should include, among other things, areas such as compliance procedures, back-up/disaster recovery procedures, personal account dealing policies and client confidentiality. A hedge fund manager should also periodically test its compliance procedures or have them audited by an external party. [See also Section A1 (2)] 4.  To prevent trading and execution failures, a hedge fund manager should put effective trading and counterparty procedures in place. [See also Section C1 (1)] 5.  A hedge fund manager should be confident that it understands the applicable laws and regulations in the markets in which it deals and has effective systems and controls in place to enable it to identify, assess, monitor and manage the risk that it is used to further financial crimes. [See also Section A3 (1)] 6.  A hedge fund manager should appoint a compliance officer who is independent of the portfolio management function to oversee all issues relating to regulatory compliance and market and professional conduct. If a smaller or start-up manager considers it impractical to do so, it should disclose this in its marketing documents and do what it reasonably can to enable the fund governing body to disclose this in the fund's offering documents. The compliance officer should report regularly to the manager’s chief executive officer or management committee or equivalent. [See also Section A3 (4)] 7.  A hedge fund manager should provide to the fund governing body a report on regulatory compliance prepared by the compliance officer on a regular basis. [See also Section A3 (4)] 8.  A hedge fund manager should put in place measures designed to ensure that the provision of fund management services to the fund will remain possible in the event of a disaster. The level of tolerance should be agreed by the executive committee of the hedge fund manager and, where relevant, be notified to the fund governing body. [see also section C4 (2) b] 9.  As part of its operational risk management procedures, a hedge fund manager should assess any exposure to model risk annually or as dictated by events and where model risk is perceived to be material to the performance of the manager, should implement appropriate procedures to ensure that material model risks are identified and mitigated where possible. 10.  A hedge fund manager should ensure security and integrity of systems and data. [See also Section C4 (1)] 11.  A hedge fund manager should ensure that it understands local conduct of business rules and regulations which apply in the jurisdictions in which it operates (including any rules governing the passporting of regulatory authorisations from one jurisdiction to another). A hedge fund manager should also ensure that it understands laws and regulations relevant to the securities in which it trades (e.g., shareholding disclosure requirements and foreign ownership rules). [See also Section A3 (1)] 12.  To enable investors and creditors to be confident that operational risks are managed satisfactorily, a hedge fund manager should make available a summary of its procedures and controls applying to the management of operational risk to investors and creditors undertaking due diligence. [See also Section D2 (1)]	View Guidance
      MFA Sound Practices for Hedge Fund Managers	A Hedge Fund Manager should seek to limit a Hedge Fund’s exposure to potential operational risks, including reconciliation errors, data entry errors, fraud, system failures and errors in valuation or risk measurement models.	View Guidance
      PWG Asset Managers' Committee Report	1.  The Manager should have a strong operational infrastructure that is commensurate with the complexity of its business, to manage and mitigate operational risks resulting from inadequate or failed internal processes, people and systems, or from external events. 2.  One or more senior operating officials, who may include a Chief Operating Officer, with functions separate from investment management, should oversee the Manager’s operational areas. 3.  The Manager should implement and maintain strong internal controls to minimize the risk of loss as a result of operational risk. 4.  The Manager should monitor its overall level of operational risk, either internally or through third-party review.	View Guidance
• Section C - Portfolio Administration and Operational Controls
  • 1. Trade and Reconciliation Procedures
    • 1. Trade Procedures and Records

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	1.  Hedge Fund managers should record detailed information on all trades executed on its own systems as well as ensuring they are sent to the Hedge Fund’s prime broker or settlement agent and administrator promptly. 2.  The Hedge Fund manager should maintain records so that all trades and trade details can be accounted for.	View Guidance
      HFSB Hedge Fund Standards: Final Report	To prevent trading and execution failures, a hedge fund manager should put effective trading and counterparty procedures in place. [See also Section B2 (11)]	View Guidance
      MFA Sound Practices for Hedge Fund Managers	1.  A Hedge Fund Manager should consider using a database to track the status of trading documentation and key provisions and terms it has negotiated, such as termination events and events of default. The Hedge Fund Manager should manage any risks associated with variations in these key provisions. 2.  A Hedge Fund Manager should seek to ensure timely execution of necessary transaction documents and enforceability of transactions.	View Guidance
    • 2. Consistency with Policy

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	If the trade is to be allocated over different accounts, the method to be used should be recorded and be consistent with the Hedge Fund manager’s stated policy.	View Guidance
    • 3. Confirmation of Trades

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	1.  All trades should be confirmed with the counterparty. 2.  The Hedge Fund manager should have appropriate procedures in place to monitor trade confirmation information to ensure that all trades are promptly confirmed and matched with counterparties.	View Guidance
    • 4. Unmatched Trades

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	The Hedge Fund manager should have clear procedures in place to address unmatched trades, and should record how unmatched trades are being resolved on a daily basis.	View Guidance
    • 5. Use of Service Providers

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	1.  The Hedge Fund manager should also ensure that contracts with service providers are as clear and practical as possible, especially in relation to liabilities. 2.  In the case of legal documentation, the Hedge Fund manager should ensure that there is sufficient expertise (e.g., external lawyers, accountants) available to be able to advise on the legal and commercial ramifications prior to entering into the documentation. Hedge Fund managers should ensure that counterparties and relevant service providers are fully informed when trades involve novation or assignment to a third party.	View Guidance
      MFA Sound Practices for Hedge Fund Managers	1.  A Hedge Fund Manager should seek consistent bilateral terms with counterparties to the extent appropriate and feasible in order to enhance stability during periods of market stress or declining asset levels. 2.  A Hedge Fund Manager should seek to negotiate bilateral collateral agreements for certain types of transactions, taking into account the relative creditworthiness of the parties and the nature of the transactions. 3.  A Hedge Fund Manager should carefully consider the selection of its execution and clearing counterparties based on factors relevant to the trading relationship.	View Guidance
      PWG Asset Managers' Committee Report	1.  In engaging key service providers, the Manager should enter into agreements that clearly delineate the service levels to be provided to it. Such services should be appropriate in light of the Manager’s internal infrastructure and the complexity of the Manager’s operations. 2.  The Manager should monitor the quality of service provided by key service providers. 3.  Responsibility for any outsourced parts of the process continues to lie with senior management or its designees.	View Guidance
    • 6. Settlement / Trade Errors

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	1.  Wherever possible, standard settlement instructions sent out by the Hedge Fund manager should be used to reduce the risk of incorrect details on any payment. 2.  When a trade fails (i.e., is not matched when settlement is due), there should be procedures in place to ensure that the Hedge Fund manager is promptly informed by the custodian and/or executing broker and that records are updated to reflect the situation. 3.  The Hedge Fund manager should have in place a policy and procedures to identify and address trade and other errors.	View Guidance
      PWG Asset Managers' Committee Report	1.  The Manager should consider whether the implementation of automated processing systems is appropriate to reduce settlement risk. Depending on the size and complexity of the organization, automation may be appropriate, where available. 2.  The Manager should provide for appropriate reporting-up policies for resolving material breaks, errors or other matters that could potentially cause risk of loss to the fund. The Manager should employ business process monitoring, analysis and optimization techniques to identify and address breaks and inefficiencies. 3.  The Manager should adopt procedures for clearing and settling transactions and for wiring funds.	View Guidance
    • 7. Reconciliation Procedures

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	1.  The Hedge Fund manager should ensure that the holdings used in trading portfolios are consistent with the underlying records held by the administrator, prime broker and (where relevant) the counterparty/custodian for OTC contracts. 2.  The Hedge Fund manager should reconcile its own recorded stock positions against the records (including corporate actions) held by the administrator and the prime broker/custodian. 3.  There should be clear escalation procedures between the Hedge Fund manager and service provider to identify and resolve differences in a timely manner, with recommended actions depending upon both the materiality and age of the differences. Valuations should not be issued to investors until all material differences are resolved.	View Guidance
  • 2. Portfolio Valuations
    • 1. Responsibility of the Hedge Fund

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for Hedge Fund Valuation	1.  The Governing Body of the Fund should ensure adequate segregation of duties in the NAV determination process, which may be achieved by delegating the calculation, determination and production of the NAV to a suitably independent, competent and experienced Valuation Service Provider. If the Investment Manager is responsible for determining the NAV, and/or acts as the Fund’s Governing Body, robust controls over conflicts of interest should be established. 2.  Oversight of the entire valuation process and, in particular, resolution of pricing issues associated with hard-to-price illiquid positions and exotic instruments remains the ultimate responsibility of the Fund’s Governing Body.	View Guidance
      AIMA Offshore Alternative Fund Directors' Guide	The Board of Directors has ultimate responsibility for the valuation of the Fund.	View Guidance
    • 2. Responsibility of the Hedge Fund Manager

      Provider	Practice	Guidance
      HFSB Hedge Fund Standards: Final Report	1.  A hedge fund manager should do what it reasonably can to enable and encourage the fund governing body to put in place valuation arrangements aimed at addressing and mitigating conflicts of interest in relation to asset valuation. 2  A hedge fund manager should do what it reasonably can to enable and encourage the fund governing body to prepare and adopt a document (a “Valuation Policy Document”) covering all material aspects of the valuation process and valuation procedures and controls in respect of the fund.	View Guidance
      MFA Sound Practices for Hedge Fund Managers	A Hedge Fund Manager, in consultation with its governing body, should determine the party who bears ultimate responsibility for the valuation of investments and disclose this information to Hedge Fund investors.	View Guidance
      PWG Asset Managers' Committee Report	1.  A Manager should establish a comprehensive and integrated valuation framework to provide for clear, consistent valuations of all the investment positions in the fund’s portfolio, while minimizing potential conflicts that may arise in the valuation process. 2.  A Manager should establish a governance mechanism, such as a valuation committee or other responsible body (referred to herein as the “Valuation Committee”) that has oversight responsibility for the Manager’s valuation framework. 3.  The Valuation Committee should have the authority and resources available to consult with the fund’s independent auditor, third-party administrator (if any), a third-party valuation firm or legal advisor, when appropriate, to understand and assess new accounting requirements impacting fair value and in situations where it is unclear how the valuation policy should be applied to certain investment positions or to unique facts and circumstances.	View Guidance
    • 3. Pre-launch Matters for the Board of the Fund

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for Hedge Fund Valuation	In advance of the Fund’s launch a summary of practical, workable pricing valuation practices, procedures and controls should be enshrined in a Valuation Policy Document and approved by the Fund’s Governing Body, after consultation with relevant stakeholders. The Valuation Policy Document should be reviewed on a regular basis by the Governing Body.	View Guidance
      AIMA Offshore Alternative Fund Directors' Guide	1.  Documented pricing procedures should be approved by the Board in advance of the Fund’s launch and should be disclosed in the Fund’s prospectus. 2.  A clearly stated Pricing Policy, together with clearly stated procedures, should be agreed between the Board, on behalf of the Fund, the Auditors, the Investment Manager and the Administrator and it should be signed off by the Board, the Investment Manager and the Administrator.	View Guidance
    • 4. Independence of the Valuation Function

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for Hedge Fund Valuation	1.  The procedures enshrined in the Fund’s Valuation Policy Document should be designed to ensure that the parties controlling the Fund’s valuation process are segregated from the parties involved in the Fund’s investment process. 2.  The industry recognises that in certain instances the Investment Manager has the best insight with respect to the valuation of particular instruments. Wherever prices are provided or sourced by the Investment Manager, the Valuation Service Provider should be furnished with sufficient supporting information by the Investment Manager.	View Guidance
      HFSB Hedge Fund Standards: Final Report	1.  Where a hedge fund manager determines the value of any of the fund's assets (whether by performing valuations in-house or providing final prices to a valuation service provider), it should operate a valuation function which is segregated from the portfolio management function and should explain its approach to investors. If a smaller or start-up manager considers it impractical to do so, it should disclose this in its marketing documents and do what it reasonably can to enable and encourage the fund governing body to disclose this in the fund's offering documents. [See also Section C2 (8) below] 2.  Where a hedge fund manager is involved in the valuation process, it should disclose in its own marketing materials, and/or do what it reasonably can to enable and encourage the fund governing body to disclose in the fund's offering documents, any actual or likely material involvement of the portfolio management team in the valuation process. Investors should then be informed, for example via manager newsletters, of any material changes to such level of involvement. [See also section C2 (8) below]	View Guidance
      IOSCO Principles for the Valuation of Hedge Fund Portfolios	1.  The Governing Body should seek to ensure that an appropriately high level of independence is brought to bear in the application of the policies and procedures and whenever they are reviewed. 2.  The policies and procedures should seek to ensure that an appropriate level of independent review is undertaken of each individual valuation and in particular of any valuation that is influenced by the Manager.	View Guidance
      PWG Asset Managers' Committee Report	1.  A Manager should have knowledgeable and qualified internal personnel (who may also perform other functions for the fund) or qualified third parties to implement the valuation policy on a day-to-day basis.  2.  The personnel carrying out the valuation function should be responsible for the appropriate pricing of the portfolio in accordance with the valuation policy and should handle the collection and evaluation of counterparty prices, broker quotes, exchange prices and third-party pricing feeds. 3.  The valuation personnel should be appropriately segregated from the Manager’s portfolio management personnel. While portfolio management personnel may be consulted on pricing issues, the valuations should be approved by the Valuation Committee. 4.  While a fund should generally seek competent and independent review or generation of its final valuations, in the case of investment positions with no readily ascertainable market value it may be necessary or appropriate to utilize properly controlled internal valuations given the absence of adequate external valuations. Accordingly, the Manager must be particularly vigilant as the potential conflicts inherent in valuing investment positions can be more pronounced in this context. 5.  To mitigate these conflicts, valuation policies and procedures should address the circumstances in which the Manager may rely upon models, the required support and documentation when using a model and the manner and frequency of reviewing models. In particular, any material exceptions or unusual situations arising in the context of a pricing model (e.g., the creation of a unique pricing model for a particular asset) should be documented and reviewed by the Valuation Committee.	View Guidance
    • 5. Polices and Procedures - Hedge Fund

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	There should be clear policies and procedures in place for valuing the underlying positions within the Hedge Fund and for calculating the Fund’s Net Asset Value (NAV).	View Guidance
      AIMA Guide to Sound Practices for Hedge Fund Valuation	1.  The Valuation Policy Document should explicitly clarify the role of each party in the valuation process, should identify price sources for each instrument type and should include a practical escalation or resolution procedure for the management of exceptions. 2.  Procedures described in the Valuation Policy Document of the Fund must be capable of practical implementation by the Valuation Service Provider. 3.  The Valuation Service Provider should use reasonable endeavours to apply any pricing policy consistently. Deviations from the policy should be approved by the Governing Body in advance of any NAV being released. 4.  Wherever possible the valuation of each position in the Fund’s portfolio should be checked against a primary and secondary price source. The Valuation Policy Document should outline the hierarchy of sources to be used for each security type and the tolerance levels for variances between the sources. 5.  Any decision to use a pricing model should be approved by the Governing Body and should be properly justified by appropriate testing. If an Investment Manager’s pricing models are used they should be independently tested and verified.	View Guidance
      AIMA Offshore Alternative Fund Directors' Guide	A formalised process for reporting valuation issues (for example, stale pricing, liquidity, difficult trading markets, illiquid assets, side pockets or subjectivity) to the Board and any Valuation Committee on a regular basis should be put in place.	View Guidance
      HFSB Hedge Fund Standards: Final Report	1.  Where a hedge fund manager performs valuations of what it considers to be hard-to-value assets in-house or is otherwise involved in providing final prices to the valuation service provider, it should do what it reasonably can to enable and encourage the fund governing body to adopt valuation procedures for such assets which are aimed at ensuring a consistent approach to determining fair value and ensure that such procedures are set out in the Valuation Policy Document. 2.  A hedge fund manager conducting valuations in-house should discuss with the fund governing body any material issues in relation to the valuation of what the manager considers to be hard-to-value assets (e.g., unavailability of a sufficient number of pricing sources or dispersion of broker quotes beyond tolerance levels) and, if the fund governing body considers it appropriate, do what it reasonably can to enable and encourage the fund governing body to disclose the same to investors. [See also Section C2 (8) below]	View Guidance
      IOSCO Principles for the Valuation of Hedge Fund Portfolios	1.  Comprehensive, documented policies and procedures should be established for the valuation of financial instruments held or employed by a hedge fund. 2.  The policies should identify the methodologies that will be used for valuing each type of financial instrument held or employed by the hedge fund. 3.  The policies and procedures should describe the process for handling and documenting price overrides, including the review of price overrides by an Independent Party.	View Guidance
      MFA Sound Practices for Hedge Fund Managers	1.  A Hedge Fund Manager should develop valuation policies and procedures, recognizing that Hedge Fund investors may both subscribe to and redeem interests in a Hedge Fund in reliance on the values derived from such policies and procedures. [see also section C2 (7) below]  2.  A Hedge Fund Manager should establish procedures to independently verify the existence of financial assets and liabilities. 3.  A Hedge Fund Manager should establish policies and procedures for the control and processing of purchases and sales of financial assets and liabilities. 4.  A Hedge Fund Manager should establish policies and procedures for the periodic reconciliation of the Hedge Fund Manager’s recorded financial assets and liabilities to statements produced by independent sources. 5.  A Hedge Fund Manager should establish procedures for obtaining confirmations and performing periodic reconciliations of OTC derivatives with its respective counterparties. 6.  A Hedge Fund Manager should establish policies for maintaining sufficient internal documentation of transactions involving non-publicly traded financial investments (other than OTC derivatives) for the purpose of facilitating and ensuring the verification of the Hedge Fund’s financial assets and liabilities. 7.  A Hedge Fund Manager should adopt an appropriate accounting standard that incorporates the concept of “fair value”. 8.  A Hedge Fund Manager’s pricing policies and procedures should be fair, consistent, and verifiable. 9.  A Hedge Fund Manager should establish pricing policies and procedures that assure that NAV is marked at fair value. 10.  A Hedge Fund Manager should establish policies for the frequency of determining a Hedge Fund’s NAV.	View Guidance
      PWG Asset Managers' Committee Report	The adoption and implementation of comprehensive, written valuation policies and procedures, consistent with best industry practice, is critical to the design and effectiveness of the Manager’s portfolio valuation process.  The valuation framework should be designed to promote consistent application of such policies and procedures and seek to provide appropriate information to investors and counterparties with a clear understanding of the limitations of such policies and procedures.	View Guidance
    • 6. Financial Statement Close Process

      Provider	Practice	Guidance
      MFA Sound Practices for Hedge Fund Managers	1.  Hedge Fund Manager should establish policies and procedures for periodic closing of books and records consistent with appropriate accounting principles. 2.  As part of the Financial Statement Close Process, a Hedge Fund Manager should incorporate procedures for the review and recordation of all financial and non-financial assets and liabilities (including accruals of interest, dividends, and recordation of all non-financial asset and liabilities, including management fees, incentive fees, and other liabilities). 3.  A Hedge Fund Manager should review the allocation of income and expense to Hedge Fund investors.	View Guidance
    • 7. Policies and Procedures - Hedge Fund manager

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	A Hedge Fund manager should have procedures and systems (independent of the administrator) in place to check all fee calculations and to enable the Hedge Fund manager to include realistic fee accruals into any intra-month Net Asset Value reporting to investors.	View Guidance
      MFA Sound Practices for Hedge Fund Managers	A Hedge Fund Manager should develop valuation policies and procedures, recognizing that Hedge Fund investors may both subscribe to and redeem interests in a Hedge Fund in reliance on the values derived from such policies and procedures. [See also Section C2 (5) above]	View Guidance
    • 8. Disclosure to Investors

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	The policy and methodology for the calculation of performance, management and administration fees should be documented in the offering document.	View Guidance
      AIMA Guide to Sound Practices for Hedge Fund Valuation	1.  The Fund’s Offering Document should explicitly name the party to whom responsibility for the calculation, determination and production of NAV has been delegated. 2.  There should be adequate disclosure of any material involvement by the Investment Manager in the pricing of underlying portfolio positions. 3.  NAV reports should be addressed directly to investors by the Administrator, where an Administrator is used, and any NAVs produced by the Investment Manager should be qualified as such.  4.  If the Governing Body approves a decision to allow the side-pocketing of illiquid/hard-to-value assets, it should ensure that side-pocket polices are clearly communicated to all investors. The criteria for side-pocketing individual positions should be as consistent as possible. [See also Section C2 (12) below]	View Guidance
      HFSB Hedge Fund Standards: Final Report	1.  The Valuation Policy Document (which it is acknowledged will contain information which is proprietary to the hedge fund manager) should be reviewed regularly by the hedge fund manager, in consultation with the fund governing body, and be made available to investors upon request on a confidential basis. [See  also Section C2 (11) below] 2.  Where a hedge fund manager is involved in the valuation process, it should disclose in its own marketing materials, and/or do what it reasonably can to enable and encourage the fund governing body to disclose in the fund's offering documents, any actual or likely material involvement of the portfolio management team in the valuation process. Investors should then be informed, for example via manager newsletters, of any material changes to such level of involvement. [See also Section C2 (4) above] 3.  A hedge fund manager should periodically disclose the percentage of the fund's portfolio that is invested in what the manager considers to be hard-to-value assets (e.g. via newsletters) and, where meaningful and applicable, the extent to which internal pricing models or assumptions are used to value certain components of the fund’s portfolio invested in hard-to-value assets. 4.  Notification of any material increase (as determined by the fund governing body) in the percentage of a fund's portfolio invested in what the manager considers to be hard-to-value assets should be disclosed to investors in a timely manner, e.g., via the manager's newsletters. 5.  A hedge fund manager should do what it reasonably can to enable and encourage the fund governing body to ensure periodic reporting of the value of side pockets in the fund’s audited annual accounts in accordance with applicable accounting standards. [See also Section C2 (12) below] 6.  A hedge fund manager conducting valuations in-house should discuss with the fund governing body any material issues in relation to the valuation of what the manager considers to be hard-to-value assets (e.g., unavailability of a sufficient number of pricing sources or dispersion of broker quotes beyond tolerance levels) and, if the fund governing body considers it appropriate, do what it reasonably can to enable and encourage the fund governing body to disclose the same to investors. [See also Section C2 (5) above]	View Guidance
      IOSCO Principles for the Valuation of Hedge Fund Portfolios	The arrangements in place for the valuation of the hedge fund’s investment portfolio should be transparent to investors.	View Guidance
      PWG Asset Managers' Committee Report	Certain investment positions in the fund’s portfolio may have no readily ascertainable market value. For many Managers these types of investments (e.g., private equity investments) are an important source of potential returns for the fund. Generally, as part of the disclosure in the PPM, investors should be informed of whether these types of investments may be made by the fund.	View Guidance
    • 9. Compliance with Valuation Policy

      Provider	Practice	Guidance
      AIMA Offshore Alternative Fund Directors' Guide	The Investment Manager and the Administrator must also ensure compliance with the valuation provisions disclosed in the Fund’s prospectus.	View Guidance
      IOSCO Principles for the Valuation of Hedge Fund Portfolios	The financial instruments held or employed by hedge funds should be consistently valued according to the policies and procedures.	View Guidance
    • 10. Due diligence of Valuation Service Provider

      Provider	Practice	Guidance
      IOSCO Principles for the Valuation of Hedge Fund Portfolios	The Governing Body should conduct initial and periodic due diligence on third parties that are appointed to perform valuation services.	View Guidance
    • 11. Periodic Review of Policy

      Provider	Practice	Guidance
      HFSB Hedge Fund Standards: Final Report	The Valuation Policy Document (which it is acknowledged will contain information which is proprietary to the hedge fund manager) should be reviewed regularly by the hedge fund manager, in consultation with the fund governing body, and be made available to investors upon request on a confidential basis. [See  also Section C2 (11) below]	View Guidance
      IOSCO Principles for the Valuation of Hedge Fund Portfolios	The policies and procedures should be reviewed periodically to seek to ensure their continued appropriateness.	View Guidance
      PWG Asset Managers' Committee Report	The Committee should periodically review the Manager’s valuation policies and procedures, including whether any patterns emerge that warrant modifications. Reviews should be conducted no less frequently than annually, or upon the occurrence of certain material events (e.g., a shift in the fund’s investment strategy, geographies, assets, instruments or sectors, or a change in market conditions or availability of pricing information for certain types of investment positions).	View Guidance
    • 12. Side Pockets and Hard-to-value Assets

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for Hedge Fund Valuation	1.  Any decision to allow the side-pocketing of illiquid/hard-to-value positions should be taken only after careful consideration by a Fund’s Governing Body. 2.  If the Governing Body approves a decision to allow the side-pocketing of illiquid /hard-to-value assets, it should ensure that side-pocket polices are clearly communicated to all investors. The criteria for side-pocketing individual positions should be as consistent as possible. [See also Section C2 (8) above]	View Guidance
      HFSB Hedge Fund Standards: Final Report	1.  If using side pockets, a hedge fund manager should ensure that the fund governing body has been consulted on, and consented to, the circumstances in which side-pockets may be used and should do what it reasonably can to enable and encourage the fund governing body to: describe the types of asset eligible for side pocketing in the Valuation Policy Document and disclose the same and the side pocketing process in the fund's offering documents; ensure that side-pocketing occurs either on or about the time the relevant asset is purchased or on or about the point at which, in the manager’s view, the relevant asset becomes hard-to-value and that the initial valuation of an asset on entering a side-pocket is at cost, the last available market price (as appropriate) or a lower number or nil ensure that where a limit to the total amount of assets which may be included in side pockets is disclosed in the fund's offering documents, such limit is not breached; ensure that management fees, if charged, for the side pocketed assets are calculated on no more than the lower of cost (or last available market price in the case of a previously liquid asset) or fair value; and ensure that any performance fees accrue for the duration of the existence of the side pocket and are paid only at the point at which the asset is finally disposed of or a liquid market price is available.  2.  A hedge fund manager should do what it reasonably can to enable and encourage the fund governing body to ensure periodic reporting of the value of side pockets in the fund’s audited annual accounts in accordance with applicable accounting standards. [See also Section C2 (8) above] 3.  A hedge fund manager should, in cases where, in its view, the fund has material exposure to hard-to-value assets, ensure that any disclosure in its own marketing materials relating to the fund's performance is accompanied by a reference to any factors which may be material to the robustness of the performance calculation. A hedge fund manager should also do what it reasonably can to enable and encourage the fund governing body to include similar references in the fund's offering documents where they include details of the fund's performance. [See also Section D1 (1)]	View Guidance
      PWG Asset Managers' Committee Report	Where a fund provides for the use of side pockets, the Manager should include in its policies and procedures guidelines regarding their use.	View Guidance
  • 3. Non-trading Transactions
    • 1. Bank Account

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for Hedge Fund Valuation	1.  The directors of the Fund itself should approve the opening of a new bank account for the Hedge Fund. The approval should be formally documented (e.g., in board minutes). 2.  All transactions should be authorised in accordance with the bank mandate. At each month end, the prime broker will post income and expense items to the prime brokerage account. The Hedge Fund manager should have adequate systems to check the accuracy of these postings.	View Guidance
    • 2. Reconciliation with Administrator

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	1.  The Hedge Fund’s administrator and the Hedge Fund manager should reconcile details of the Hedge Fund’s bank accounts on a regular, perhaps daily, basis. 2.  The Hedge Fund manager should obtain records of net subscriptions and redemptions provided by the administrator.	View Guidance
    • 3. Anti-Money Laundering

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	The Hedge Fund manager should also familiarise itself with the extent, if any, to which it may rely upon the administrator’s anti-money laundering procedures, and ensure that, between itself, the administrator and any other service providers, there are adequate procedures in place to complete client identification checks.	View Guidance
  • 4. Information Systems and Business Continuity
    • 1. IT Systems

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	1.  There should be high standards of security and integrity over the computer systems that are used by the Hedge Fund manager. 2.  Where the Hedge Fund manager is to place critical reliance on the contents of a spreadsheet, the data should be adequately backed up and appropriate arrangements should be in place as to who may have access to them.	View Guidance
      HFSB Hedge Fund Standards: Final Report	A hedge fund manager should ensure security and integrity of systems and data. [See also Section B2 (11)]	View Guidance
      MFA Sound Practices for Hedge Fund Managers	1.  A Hedge Fund Manager should establish policies and procedures to control changes to any software applications, data and IT infrastructure. 2.  A Hedge Fund Manager should establish policies and procedures for logical and physical security over software applications, data and IT infrastructure. 3.  A Hedge Fund Manager should establish policies and procedures for IT operations, including backup and recovery of data, scheduling and problem management.	View Guidance
    • 2a. Business Continuity - Ownership

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	1.  The Hedge Fund manager should develop a Business Continuity Plan to cater for a disaster. 2.  At a high level, the Hedge Fund manager should ensure that the Business Continuity Plan is owned by a senior business manager (i.e., not just technology), that the plan has been written with input from all senior and key personnel across the business, and that the most critical business activities have been identified and appropriate actions identified to maintain operations.	View Guidance
      AIMA Guide to Business Continuity Management for Hedge Fund Managers	For a Business Continuity Plan to be effective, it must be owned and supported by a senior company official, who would usually be the Chief Operations Officer and who should hold director or similar status.	View Guidance
      PWG Asset Managers' Committee Report	To mitigate financial loss in the event of disaster or other business disruption, the Manager should establish a comprehensive Business Continuity/Disaster Recovery plan.	View Guidance
    • 2b. Business Continuity - Management and Control

      Provider	Practice	Guidance
      AIMA Guide to Business Continuity Management for Hedge Fund Managers	A Crisis Management Team made up of senior managers who represent the whole organisation should manage the organisational issues of an event. This team must be responsible for the evaluation of the event and the response to it until full resumption is achieved.	View Guidance
      HFSB Hedge Fund Standards: Final Report	A hedge fund manager should put in place measures designed to ensure that the provision of fund management services to the fund will remain possible in the event of a disaster. The level of tolerance should be agreed by the executive committee of the hedge fund manager and, where relevant, be notified to the fund governing body. [See also Section B2 (11)]	View Guidance
      MFA Sound Practices for Hedge Fund Managers	1.  A Hedge Fund Manager should develop a comprehensive BC/DR plan that establishes clear policies and procedures for internal personnel and external service providers to prepare for unexpected events. 2.  A Hedge Fund Manager should establish a BC/DR plan that provides contingencies in the event of the death or incapacity of its founder or one of its key persons, including succession planning. 3.  A Hedge Fund Manager should establish policies and procedures to protect personnel in the event of a crisis making the work environment unsafe. 4.  A Hedge Fund Manager should establish a written BC/DR plan that outlines practices to be followed in an emergency or significant market disruption. 5.  A Hedge Fund Manager should review its BC/DR plan to ensure it is consistent with applicable laws, rules and regulations. [See also Section A3 (1)] 6.  A Hedge Fund Manager’s BC/DR plan should establish practices to be followed in an emergency or significant market disruption with respect to communications with personnel or external parties. 7.  A Hedge Fund Manager’s BC/DR plan should include systems for storing and protecting hard and soft copies of documents, trade records and essential communications. 8.  A Hedge Fund Manager’s BC/DR plan should provide for IT contingency arrangements that factor in geography, accessibility of records, security, environment and cost. 9.  A Hedge Fund Manager’s BC/DR plan should establish a person or team responsible for monitoring regulatory and reporting compliance requirements in the event of a disaster or interruption with trading operations. 10.  A Hedge Fund Manager should determine whether it is necessary to use third-party service providers and vendors in establishing its BC/DR plan. 11.  A Hedge Fund Manager should be aware of resources available from the federal and local governments, and international regulators, if applicable, to gather information about threat dissemination services that are targeted at the financial services sector and that provide information regarding threats to physical and cyber security.	View Guidance
    • 2c. Business Continuity - Business impact analysis and inventory

      Provider	Practice	Guidance
      AIMA Guide to Business Continuity Management for Hedge Fund Managers	1.  The first stage is to identify the business critical activities across the whole organisation. 2.  Managers should make sure that key suppliers have their full contact details.	View Guidance
    • 2d. Business Continuity - Protection and recovery plans

      Provider	Practice	Guidance
      AIMA Guide to Business Continuity Management for Hedge Fund Managers	1.  The company must decide who can declare that contingency arrangements should start. 2.  A clear chain of command is required, with at least two, and preferably more, people able to take control. 3.  The key roles/responsibilities to be played in the recovery should be identified, and more than one person should be able to fill each key role (especially the IT system administrator role). 4.  As the company switches to crisis and recovery level systems and processes, it is vital to plan for the return to business as usual.	View Guidance
      MFA Sound Practices for Hedge Fund Managers	A Hedge Fund Manager should establish contingency plans for responding to the failure of a third-party fund administrator, credit provider, or other mission-critical party that would affect a Hedge Fund’s market, credit or liquidity risk. [See also Section B2 (1)]	View Guidance
    • 2e. Business Continuity - Testing

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	The Business Continuity Plan, including a full systems test, should be tested, preferably without warning, at least once per year.	View Guidance
      AIMA Guide to Business Continuity Management for Hedge Fund Managers	The Business Continuity Plan cannot be claimed to be effective until it has been tested.	View Guidance
      MFA Sound Practices for Hedge Fund Managers	A Hedge Fund Manager should test and update its BC/DR plan at least annually, to ensure that all personnel know their roles and that technology is sufficient during the BC/DR contemplated event.	View Guidance
    • 2f. Business Continuity - Updating

      Provider	Practice	Guidance
      AIMA Guide to Business Continuity Management for Hedge Fund Managers	The company needs a clear plan for keeping Business Continuity Plan arrangements up to date. There needs to be clear ownership of the Business Continuity plan and regular review cycles.	View Guidance
• Section D - Raising Capital and Investor Relations
  • 1. Raising Capital
    • 1. Marketing

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	1.  Hedge Fund managers must be conscious of the regulatory restrictions that apply to promoting their services and marketing the Hedge Funds whose investments they manage. [See also Section A3 (1)] 2.  A Hedge Fund’s offering document should provide disclosure to potential investors which is sufficient to allow them to make an informed investment decision, including material risks, potential conflicts of interest for both the Hedge Fund manager and service providers and directors, material aspects of the valuation methodology, liquidity, the investment objective, strategy and restrictions, service providers and directors. Supplemental disclosures should be made in respect of material changes in any of the above. The directors of the Hedge Fund should affirmatively take responsibility for the statements in the offering document. [See also Section E1 (4)] 3.  The Hedge Fund manager should take adequate time and care to prepare suitable marketing materials. 4.  Before being used, marketing materials should be approved by the Hedge Fund manager’s compliance function having, where necessary, taken appropriate legal or regulatory advice. 5.  A Hedge Fund manager should prepare a marketing plan to help focus on the type and scale of investors that it will seek to attract. 6.  When engaging third party marketers, the Hedge Fund manager should consider a number of business issues, including the suitability of the marketers properly to represent the Hedge Fund manager or product being marketed and the standing and reputation of the marketers. 7.  Hedge Fund managers should periodically review the levels of service being provided by the third party marketers and take appropriate action where the expected service levels or objectives are not being achieved or require adjustment.	View Guidance
      AIMA Offshore Alternative Fund Directors' Guide	1.  In terms of new business activities, the Directors should make themselves aware of the overall plans that the Investment Manager, and any distributors it has appointed, have to promote the Fund. 2.  A report should be available quarterly, summarising gross and net subscriptions, so that the size of the Fund against its theoretical capacity can be monitored. 3.  Once a year, the Directors should ask for a new business presentation by the Investment Manager to ensure that the proposition to the investors is aligned with the description of the Fund contained in the prospectus. 4.  Every Fund is required to state its investment policies and restrictions in its prospectus, making current and prospective investors aware of the types of investments the Fund may make and the goals it is trying to achieve. The Directors’ role is to monitor the Fund to see that it complies with its stated investment policies and restrictions. [See also Section E1 (1)]	View Guidance
      HFSB Hedge Fund Standards: Final Report	1.  A hedge fund manager should ensure that its own marketing materials refer to the fund’s offering documents and make it clear that investors should rely only on the fund’s offering documents when making any decision to invest. 2.  A hedge fund manager should do what it reasonably can to enable and encourage the fund governing body to disclose the commercial terms applicable to a particular hedge fund in sufficient detail and with sufficient prominence (taking into account the identity and sophistication of potential investors) in the fund's offering documents. 3.  A hedge fund manager should, in cases where, in its view, the fund has material exposure to hard-to-value assets, ensure that any disclosure in its own marketing materials relating to the fund's performance is accompanied by a reference to any factors which may be material to the robustness of the performance calculation. A hedge fund manager should also do what it reasonably can to enable and encourage the fund governing body to include similar references in the fund's offering documents where they include details of the fund's performance. [See also Section C2 (12)] 4.  A hedge fund manager should disclose to investors in its own marketing materials that it has a policy to prevent market abuse (no disclosure of the actual policy is required). [See also Section A3 (2)] 5.  A hedge fund manager should disclose and explain its investment and risk management approach in its own marketing materials and do what it reasonably can to enable and encourage the fund governing body also to include, to the appropriate extent, such disclosure and explanation in the fund’s offering documents. In addition to disclosure recommended in Standard 1 (Investment policy and risk disclosure), a summary of the risk framework (processes and risk management techniques employed) should be disclosed. [See also Section D2 (1)]	View Guidance
      PWG Asset Managers' Committee Report	1.  A Manager should provide potential investors with a private placement memorandum (PPM) or other offering documents or supplemental materials sufficiently in advance of a subscription to permit investors to adequately consider that information in formulating their investment decisions. 2.  For funds open to new investments, PPMs should be updated or supplemented when a material change occurs that makes the PPM materially inaccurate or misleading in light of other information previously provided by the Manager. [See also Section D2 (2)] 3.  For funds open to new investments, the Manager should review the PPM annually to assess whether, in light of ongoing developments in the fund, it is appropriate to provide additional information or more detail regarding any matters in the PPM. Any updated PPMs should be provided to all investors in the fund.	View Guidance
    • 2. AML

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	The Hedge Fund manager should ensure that a senior individual is responsible for its anti-money laundering compliance and that all employees are kept up to date with developments in this area. The Hedge Fund manager should also ensure that appropriate procedures and controls are in place to ensure that the relevant rules and requirements are considered, particularly when marketing to potential investors.	View Guidance
      AIMA Offshore Alternative Fund Directors' Guide	1.  The Board should understand the nature of the AML requirements which apply in respect of the Fund and whether responsibility for implementing the necessary procedures has been delegated, as will often be the case, to the Administrator or the Investment Manager. 2.  The Board should obtain regular feedback from the Administrator or Investment Manager, to ascertain that the formal procedures in place are being adhered to and that any suspicious findings were raised and investigated accordingly. All suspicious findings and the results of the subsequent investigation should be promptly reported to the Board. 3.  The Board should additionally obtain and review the Administrator’s SAS 70 (or equivalent controls report, if it has one) covering all aspects of the Administrator’s operations, including its AML procedures, as well as the exit letter from regulator investigations/audits at the Administrator, if either exists. 4.  The AML policies and procedures adopted by the Administrator or the Investment Manager should be in compliance with the AML laws and regulations which apply to the Fund in its jurisdiction of incorporation as well as in the jurisdictions of the Administrator and the Investment Manager. 5.  The Board should ensure any changes in the applicable AML laws and regulations are promptly addressed and suitable procedures adopted. 6.  The policy adopted should generally also ensure that, until the AML procedures are completed satisfactorily, any new subscription monies remain in the subscriptions bank account and are not transferred into the prime brokerage account. 7.  The policy adopted should also ensure that redemptions are paid into the account from which the original investment was wired. In the event that the redeeming investor requests that redemption proceeds be paid into an account different from that from which the investment was paid, the redeeming investor would normally be asked to substantiate in writing the reason(s) for the new account. 8.  In the event that a subscription has been accepted without receipt of the full AML documentation, the Administrator must retain the redemption proceeds until the outstanding documentation has been provided.	View Guidance
      MFA Sound Practices for Hedge Fund Managers	As part of its overall regulatory compliance program, a Hedge Fund Manager should establish AML policies and procedures and ensure that its personnel and service providers follow appropriate investor identification procedures.	View Guidance
    • 3. Side Letters

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	Hedge Fund managers should consider carefully any conflicts of interest they create by agreeing to special terms and any legal and regulatory requirements to disclose the existence and content of special agreements and side letters.	View Guidance
      AIMA Offshore Alternative Fund Directors' Guide	1.  If the Fund enters into side letters, the Directors should ensure that the terms in any letter are explained to them by the Investment Manager and, if needed, by the Fund’s lawyers, prior to acceptance. The Board should be made aware of all such arrangements. It needs to be understood by the manager, the adviser and the Board as to which of them should be (or legally is able to be) the signatory of such letters. 2.  Directors should also ensure that the use of side letters is monitored on a regular basis for actions that are needed. 3.  The Directors must also consider their fiduciary duties as Directors, which include a duty to act bona fide in what they consider to be the best interests of the Fund. This duty is owed to the Fund itself and the effect of this is that the Directors are not entitled to consider solely the interests of a specific shareholder or the Investment Manager in determining whether or not to enter into a side letter. 4.  The Fund’s Directors and/or the Investment Manager should ensure that existing investors have received adequate disclosure that other investors in the same class of shares may be permitted to invest on different and/or more favourable terms and conditions in order for the Directors to fulfil their Directors’ duties and the Investment Manager to fulfil its common law fiduciary duties. 5.  The Investment Manager will be required to disclose the existence of a side letter which contains “material terms”, and the nature of such terms, where the Investment Manager is party to the side letter or is aware that the Fund, of which the Investment Manager or an affiliated entity is the Investment Manager, is a party to it.	View Guidance
      HFSB Hedge Fund Standards: Final Report	A hedge fund manager should disclose the existence of side letters which contain “material terms”, and the nature of such terms. A hedge fund manager is not required to disclose the existence of side letters which contain no material terms.	View Guidance
      MFA Sound Practices for Hedge Fund Managers	When a Hedge Fund Manager has the discretion to grant (or has, in the past, granted) —through a side letter or similar arrangement — any more favourable rights to certain investors that may have a material impact on other investors, the Hedge Fund Manager should: make appropriate disclosures to investors in the Hedge Fund; and consider issues associated with the approval and monitoring of any special terms to investors.	View Guidance
      PWG Asset Managers' Committee Report	1. In circumstances where side letters provide certain investors with terms that may adversely impact other investors in the fund, the Manager should make such disclosure as may be reasonably necessary to enable other investors to assess the possible impact of such side letters on their investments. 2.  The Manager should disclose, in the manner the Manager deems appropriate, the existence and terms of side letters containing terms such as those set forth below, which are generally more likely to adversely impact other investors: enhanced control rights (e.g., over investment decisions or the hiring of or changes in key personnel); preferential liquidity/redemption rights, “key personnel” provisions and redemption “gate” waivers; if preferential fees are made available, a statement to that effect; and terms that materially alter the investment program disclosed in the fund’s offering documents. 3.  In circumstances wherein parallel managed accounts give rise to issues similar to those arising in the context of side letters or provide investors with terms that may, under certain circumstances, adversely impact other investors in the fund, the same principles that apply to the disclosure of side letters should apply, as appropriate, to the disclosure of parallel managed accounts.	View Guidance
    • 4. Legal Separation of Fund and Manager

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	Hedge Fund managers should not themselves purport to bind the Hedge Fund where they have no legal authority to do so.	View Guidance
  • 2. On-going Investor Communications
    • 1. Providing Information to Investors

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	1.  Hedge Fund managers should provide adequate disclosure of information to investors on a consistent and timely basis. 2.  Disclosure to investors should be made as soon as reasonably practicable, bearing in mind the need to protect all investors’ interests and any applicable legal or regulatory constraints. The Hedge Fund manager should be aware of these requirements and may wish to monitor compliance with them, though it has no legal obligation to do so. 3.  The maximum level of intended leverage should be disclosed to investors. [see also Section B2 (7)]	View Guidance
      AIMA Offshore Alternative Fund Directors' Guide	1.  A summary of shareholder correspondence should be provided quarterly by both the Investment Manager and the Administrator/Transfer Agent, highlighting key issues being raised so that the Board is aware of common themes such as concerns about performance or concerns about efficient administration. 2.  Directors are responsible for ensuring that shareholders receive, as a bare minimum, the information that is promised to them in the Fund’s prospectus.  3.  The Directors should seek positive assurance from the Administrator that mailings to shareholders have occurred within statutory deadlines.	View Guidance
      HFSB Hedge Fund Standards: Final Report	1.  A hedge fund manager should do what it reasonably can to enable and encourage the fund governing body to include an appropriate level of disclosure (taking into account the identity and sophistication of potential investors) and explanation in the fund's offering documents of the fund’s investment policy/strategy and associated risks. 2.  A hedge fund manager should do what it reasonably can to enable and encourage the fund governing body to include in the fund's annual report a statement explaining how the fund has invested its assets during the relevant period in accordance with its published investment policy. 3.  A hedge fund manager should disclose and explain its investment and risk management approach in its own marketing materials and do what it reasonably can to enable and encourage the fund governing body also to include, to the appropriate extent, such disclosure and explanation in the fund’s offering documents. In addition to disclosure recommended in Standard 1 (Investment policy and risk disclosure), a summary of the risk framework (processes and risk management techniques employed) should be disclosed. [See also Section D1 (1)] 4.  To enable investors and creditors to be confident that operational risks are managed satisfactorily, a hedge fund manager should make available a summary of its procedures and controls applying to the management of operational risk to investors and creditors undertaking due diligence. [See also Section B2 (11)] 5.  A hedge fund manager should, to the extent it is able or permitted to do so, provide information on the fund’s committed funding or financing arrangements with prime brokers/lenders to investors in its due diligence documents or upon request.	View Guidance
      MFA Sound Practices for Hedge Fund Managers	1.  A Hedge Fund Manager should provide prospective and existing Hedge Fund investors with information regarding the Hedge Fund’s investment objectives and strategies, range of permissible investments, material risk factors and the material terms of an investment in the Hedge Fund. This information should be sufficient to enhance the ability of investors to understand and evaluate their investment in the Hedge Fund. 2.  A Hedge Fund Manager should work with its legal counsel to identify and adequately describe risks to be disclosed to Hedge Fund investors. 3.  A Hedge Fund Manager should develop and maintain a code of ethics and personal trading policies that include the appropriate use of material, non-public information. A Hedge Fund Manager should communicate the material aspects of this code and policies to Hedge Fund investors. [See also Section B1 (12)] 4.  A Hedge Fund Manager should periodically provide Hedge Fund investors with relevant performance data and, when appropriate, risk information regarding the strategy and terms of the Hedge Fund. 5.  A Hedge Fund Manager should deliver annual audited financial statements to Hedge Fund investors in a timely manner or as may otherwise be prescribed by laws or regulations. 6.  In relation to reporting to Hedge Fund investors, a Hedge Fund Manager should incorporate procedures that seek consistency between periodic reports and annual audited financial statements. 7.  A Hedge Fund Manager should disclose to Hedge Fund investors its relationships with prime brokers and other brokers that involve potential material conflicts of interest and, taking into account the nature of the Hedge Fund Manager’s business and type of investments or instruments traded, develop the appropriate policies and procedures. [See also Section B1 (11)]	View Guidance
      PWG Asset Managers' Committee Report	1.  A Manager should establish a disclosure framework designed to disclose material information to investors with sufficient frequency and detail, including with respect to financial and risk information and potential conflicts of interest, so that investors are able to: make informed decisions regarding investments in the fund, and appropriately monitor or manage the risks associated with exposure to the fund. A robust disclosure framework is critical to the protection of investors’ interests. The framework should also include guidelines to address providing information to counterparties (commensurate with the relationship with the counterparties), subject to appropriate assurances of confidentiality. 2.  The Manager should provide investors with updated, material information on a regular and ongoing basis and communicate that information to investors as set forth in the Manager’s disclosure framework.	View Guidance
    • 2. Disclosure of Material Changes

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	The Hedge Fund manager, as far as practical, should aim to disclose information about material items and changes to all investors who will be affected by such items and changes.	View Guidance
      HFSB Hedge Fund Standards: Final Report	A hedge fund manager should do what it reasonably can to enable and encourage the fund governing body to disclose any material changes to such commercial terms to investors.	View Guidance
      PWG Asset Managers' Committee Report	For funds open to new investments, PPMs should be updated or supplemented when a material change occurs that makes the PPM materially inaccurate or misleading in light of other information previously provided by the Manager. [See also Section D1 (1)]	View Guidance
    • 3. Fair Disclosure Between Investors

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	The Hedge Fund manager should seek not to differentiate communications to investors, either in terms of the nature, content, manner or timing of disclosures, except as justified by the different relevance of the communication to the investors.	View Guidance
      PWG Asset Managers' Committee Report	A Manager should endeavor to provide all investors with a consistent level of information. In providing diligence information, a Manager may consider developing its own standard presentation. Managers may employ different forms of presentation among investors, or individually answer questions from investors in the course of due diligence reviews or ongoing investor inquiries, provided the Manager does not selectively disclose material information among investors.	View Guidance
    • 4. Investor Queries

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	A Hedge Fund manager should devote adequate resources to responding to investor queries (made either directly or through the administrator).	View Guidance
      PWG Asset Managers' Committee Report	Where a Manager receives requests from an investor for additional disclosure or clarification of existing disclosure, the Manager should consider whether to make the disclosure and, if appropriate, should be willing to make such information available to all investors upon request.	View Guidance
• Section E - Hedge Fund Structure and Organisation
  • 1. Structure of the Hedge Fund
    • 1. Structure

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	The structure of a proposed Hedge Fund should be considered in consultation with professional advisers and adapted to the distribution objectives, i.e., targeted investors and their geographical location.	View Guidance
      HFSB Hedge Fund Standards: Final Report	Prior to the establishment of a fund, a hedge fund manager, should assess where the fund governance structure should lie on a “spectrum” of governance approaches. In light of that assessment, the manager should be proactive in seeking to ensure that a fund governance structure which is suitable and robust to oversee and handle potential conflicts of interest is put in place at the outset.	View Guidance
      PWG Asset Managers' Committee Report	Managers should evaluate whether, and document how, each investor’s qualifications satisfy requisite legal standards appropriate to the structure of the fund, typically through subscription agreements. [See also Section A3 (1)]	View Guidance
    • 2. Listing

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	A Hedge Fund should obtain professional advice to determine whether and, if so when, it should seek to list some, or all, of its shares on a recognised stock exchange.	View Guidance
      AIMA Offshore Alternative Fund Directors' Guide	If the Fund’s shares are admitted to listing on a stock exchange, both the Fund itself and the Fund’s Directors will be responsible for ensuring that the Fund complies with the continuing obligations imposed by the rules of that stock exchange.	View Guidance
    • 3. Approval of Prospectus

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	The directors of a Hedge Fund should approve a final version of the prospectus, offering memorandum or other offering document and constitutional documents such as Memorandum and Articles of Association or Limited Partnership Agreement and all material contracts to be entered into by the Hedge Fund, in a formal meeting prior to the commencement of the offer of interests.	View Guidance
      AIMA Offshore Alternative Fund Directors' Guide	1.  The Directors both collectively and individually take overall responsibility for all matters relating to the Fund. A key part of this duty is the approval of the Fund’s prospectus, the subscription documents, the Fund’s constitutional documents and its material contracts. This approval will usually be given at the inaugural Board meeting of the Fund. 2.  The Directors should carry out a periodic review of the Fund’s prospectus and subscription documents (e.g., annually) to ensure that they remain up to date.	View Guidance
    • 4. Offering Documentation and Prospective Investors

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	A Hedge Fund’s offering document should provide disclosure to potential investors which is sufficient to allow them to make an informed investment decision, including material risks, potential conflicts of interest for both the Hedge Fund manager and service providers and directors, material aspects of the valuation methodology, liquidity, the investment objective, strategy and restrictions, service providers and directors. Supplemental disclosures should be made in respect of material changes in any of the above. The directors of the Hedge Fund should affirmatively take responsibility for the statements in the offering document. [See also Section D1 (1)]	View Guidance
      HFSB Hedge Fund Standards: Final Report	1.  A hedge fund manager should do what it reasonably can to enable and encourage the fund governing body to disclose details of the fund governance structure which is put in place in the fund’s offering documents. 2.  A hedge fund manager should do what it reasonably can to enable and encourage the fund governing body to disclose the existence of any class of shares which are held only by the manager (or an entity connected with the manager) and which carry voting rights affecting any aspect of decision-making in respect of the fund in the fund’s offering documents.	View Guidance
    • 5a. Directors - Requirements

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	Directors should consist of natural persons rather than corporate entities. The directors should have relevant standing and experience to allow them to discharge their fiduciary and other duties. The directors should be prepared to act in the interest of the investors and to disclose any potential conflicts of interest that may prevent this.	View Guidance
      AIMA Offshore Alternative Fund Directors' Guide	The Directors of a Fund must have the necessary collective expertise to understand the Fund’s trading and the nature of the underlying investments, including their risk profile and liquidity. They need to have the ability and experience to evaluate the Fund’s performance and the performance of key service providers.	View Guidance
    • 5b. Directors - Appointment

      Provider	Practice	Guidance
      AIMA Offshore Alternative Fund Directors' Guide	Best practice for any Fund would be to have a majority of independent offshore Directors and to avoid appointing Directors who represent the advisers or service providers to the Fund because of the potential for conflicts of interest.	View Guidance
      HFSB Hedge Fund Standards: Final Report	A hedge fund manager should, on the establishment of a fund, do what he reasonably can to encourage and assist the fund governing body to identify and recruit members of the fund governing body with suitable experience and integrity to enable the fund governing body to be able to discharge effectively its role with the appropriate level of independence.	View Guidance
    • 5c. Directors - The Board and its Role

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	Directors should meet at appropriate intervals in minuted board meetings in a location which does not itself give rise to tax or regulatory issues for the Hedge Fund.	View Guidance
      AIMA Offshore Alternative Fund Directors' Guide	1.  Any Director should have sufficient and relevant knowledge and experience to carry out his duties as Director. He should also be able to devote sufficient time to carry out those duties and that should be reflected in his remuneration. 2.  It is recommended that Directors should: set their own compensation, to avoid potential conflicts in having it set by the Investment Manager they oversee; and have the power, in appropriate circumstances, to hire their own lawyer to advise them (paid for out of the Fund’s assets). 3.  If the Investment Manager is located in the UK, the Chairman, if one is appointed, should not be a UK resident. Otherwise, it is usually for the Board to decide who is Chairman. 4.  There is no obligation on a Board to create any sub-committees. However, there may be circumstances when matters may be better or more quickly dealt with by the creation of smaller, specialist decision-making sub-groups. Any sub-committees should, however, be formally created with written terms of reference ratified by the Board. All proceedings and decisions of sub-committees should be formally reported to the Board and fully ratified by resolution. 5.  In practice, the Board will rely on the Administrator to report on the performance of each share class, in terms of figures and it will expect copies of all investment reports sent to investors by the Investment Manager, who should report to the Board for each of its quarterly meetings as to total performance, market conditions and any problems encountered; such reports will explain how the performance was achieved and what risk profile was adopted to generate returns. The Board will also want to understand how the performance compares both with the Fund’s investment objective and with a representative sample of peer managers. 6.  Every Fund is required to state its investment policies and restrictions in its prospectus, making current and prospective investors aware of the types of investments the Fund may make and the goals it is trying to achieve. The Directors’ role is to monitor the Fund to see that it complies with its stated investment policies and restrictions. [See also Section D1 (1)] 7.  The Directors should ask the Fund’s Investment Manager or Administrator to produce a report on the Fund’s compliance with its stated investment policies and restrictions for consideration at each Board meeting. [See also Section B1 (6)] 8.  The Board is responsible to the shareholders for ensuring that the Fund adheres to its investment objectives and restrictions. [See also Section B1 (2)] 9.  It remains the Board’s duty to satisfy itself that all contractual service relationships are properly working and the service providers should receive regular reports of the Board’s meetings (quarterly, at least), which review the service and detail any errors or problems arising. 10.  The Directors should be aware that: auditors may be required to consolidate the accounts of the holder of the founder shares with those of the Fund if they provide “control” of the Fund for accounting purposes; and exclusive voting rights must be disclosed in the prospectus. 11.  The Board’s information requirements should include copies of all information that is provided to investors (usually monthly or quarterly newsletters), together with key documents filed on behalf of the Fund with regulatory agencies and exchanges. The future prospects for the Fund are also a responsibility of the Board. 12.  In terms of frequency of information, subscriptions and redemptions should be reported at regular quarterly Board meetings. Subscriptions and redemptions information should also be reported at any special Board meeting which occurs at a critical time for the Fund where redemption requests have built up and would have a considerable impact on a particular dealing day. 13.  It is normal practice for Funds to reserve the right for the Board of Directors to exercise a discretionary waiver, on request by an investor, over certain terms and conditions relating to subscription or redemption. All such areas of discretion should be clearly set out in the Fund’s prospectus. 14.  When exercising a discretionary waiver, the Directors will rely on advice from the Investment Manager that, in doing so, the interests of existing investors are not being compromised. They may also wish to ensure that a waiver on any particular dealing date is applied equitably across all subscribing or redeeming investors who are affected. 15.  Because most waivers are sought at short notice, the Directors may wish to delegate the authority to agree the waiver to the Investment Manager within certain pre-agreed parameters or to a single Director or a committee. 16.  The Board may wish to receive independent guidance from time to time on a specialist topic from a party other than one of the contracted service providers. 17.  The Directors must be aware of whether, and in what circumstances, they are permitted to appoint an expert or an adviser and whether the costs of doing so are chargeable to the Fund; the prospectus will provide guidance on what is permissible.	View Guidance
      HFSB Hedge Fund Standards: Final Report	A hedge fund manager should carefully consider the extent to which the adoption by the fund governing body of all or parts of established codes of corporate governance or other director guidance is appropriate and do what it reasonably can to encourage and assist the fund governing body to act accordingly. This includes ensuring that the fund governing body has adequate resources to comply with any such corporate governance code or director guidance.	View Guidance
    • 5d. Directors - Board Meetings

      Provider	Practice	Guidance
      AIMA Offshore Alternative Fund Directors' Guide	1.  Board meetings should be held sufficiently frequently so that the Board is effectively able to carry out its role and so that relevant guidance on the broader tax issues is complied with. 2.  Where an offshore Fund’s Board chooses not to meet in the jurisdiction of incorporation of the Fund, it is strongly recommended that the Board avoid holding meetings regularly in any single jurisdiction and it should, as a general rule, hold Board meetings in many different jurisdictions so as to reduce the risk of the Fund becoming taxable in any one of those jurisdictions. In no circumstances should a Fund’s Board meet in the UK or Ireland because of the risk that the tax authority in either jurisdiction might deem the Fund to be taxable within it. The Board should not meet at all in those jurisdictions where there are UK or Irish resident Directors. 3.  Both for general corporate governance reasons and having regard to relevant guidance on the broader tax residence issues, the documents and records (including minute books) for the Fund should be kept outside the jurisdiction in which the Investment Manager is resident. 4.  Fund Boards should decide how executive authority is to be exercised in between Board meetings because it is unrealistic to expect all governance decisions to be made only at the physical quarterly Board meetings. 5.  Whereas Directors can delegate decision-making to other bodies, they cannot avoid responsibility for the decisions or actions thereby arising. The Directors should define in advance those more routine items of business that can be delegated to a sub-committee or a service provider. Any decisions made by a delegated body should be reported to the Board in writing at the next regular meeting so that they can be ratified.	View Guidance
      HFSB Hedge Fund Standards: Final Report	A hedge fund manager should encourage and assist the fund governing body to meet regularly, to conduct such meetings in a manner which safeguards the intended legal, regulatory and tax status of the fund and to document such meetings properly.	View Guidance
    • 5e. Directors - Relationship with the Fund Manager

      Provider	Practice	Guidance
      AIMA Offshore Alternative Fund Directors' Guide	1.  The Investment Manager will, for legal purposes, often be treated under the laws of its jurisdiction as a fiduciary of the Fund (e.g., this is the case for UK based Investment Managers). 2.  The scope of any fiduciary duties owed by the Investment Manager to the Fund will be based on the scope of the Investment Manager’s role. 3.  In addition to fiduciary duties, an Investment Manager may also have other obligations to the Fund for which claims may be made in case of breach. 4.  The Board’s ongoing review of the Investment Manager’s performance will necessarily include an evaluation of whether or not these duties have been fulfilled. 5.  Matters in which the Investment Manager has discretion should be determined by the Investment Management Agreement (IMA), which is put in place between the Fund and the Investment Manager. 6.  Assessing the performance of the Investment Manager is an ongoing responsibility of the Board, to be carried out at every Board meeting.	View Guidance
      HFSB Hedge Fund Standards: Final Report	A hedge fund manager should, throughout the life of the fund, be cognisant of the need for the fund governing body and governance processes to be effective and appropriate (having regard, among other things, to any changes in the nature of the fund and its investors), advise the fund governing body accordingly and do what it reasonably can to encourage and assist the fund governing body to make any changes which, in the light of such advice, the fund governing body considers to be necessary or desirable (including recommending suitable individuals it has identified as additional or replacement directors as appropriate).	View Guidance
    • 5f. Directors - D&O insurance

      Provider	Practice	Guidance
      AIMA Offshore Alternative Fund Directors' Guide	1.  Fund Directors should also consider employing a specialist insurance lawyer to review the D&O products on their behalf. 2.  Directors need to consider what are their own, and the Fund’s, key exposures and whether the D&O policy correctly addresses these.	View Guidance
  • 2. Independent Service Providers
    • 1. Appointment

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	1.  A Hedge Fund should appoint relevant reputable and experienced service providers. 2. The Hedge Fund manager should be satisfied that the service providers have the requisite level of expertise and technology to deliver the services required to support the investment strategy and investor base effectively. [See also Section B1 (2)]	View Guidance
      PWG Asset Managers' Committee Report	The Manager should select reputable service providers that have expertise and experience suitable to appropriately support its business.	View Guidance
    • 2. Due Diligence

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	1.  Appropriate due diligence (which may include face-to-face meetings with, and office visits to, the service provider) including the taking up of references should be carried out, generally by the Hedge Fund manager or its professional advisers on the Hedge Fund’s behalf, prior to starting the business relationship. 2.  Where key functions are outsourced, management must be satisfied as to the competency of the relevant service provider and should have a process in place to monitor and review work performed. [See also Section A1 (3)] 3. The firm should ensure that it undertakes suitably robust reviews of the third parties to provide itself with the assurance that they are performing the outsourced functions in accordance with their service level agreements. [See also Section A1 (3)]	View Guidance
      HFSB Hedge Fund Standards: Final Report	1.  A hedge fund manager should ensure that careful due diligence on third party service providers is conducted before recommending them to the fund governing body. 2.  A hedge fund manager should disclose the names of its principal third party service providers in its due diligence documents or upon request. [See also Section A1 (3)]	View Guidance
    • 3. Documentation of Roles

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	1.  Service providers’ roles, responsibilities and liabilities should be clearly documented and their performance should be periodically reviewed and documented by the Hedge Fund manager on behalf of the directors of the Hedge Fund. 2.  The directors of the Hedge Fund, or the Hedge Fund manager on their behalf, should have regular contact with the service providers to establish good relationships, monitor and review information flows, deal with issues as they arise and continue to look for ways that the service providers can add value. 3.  The Hedge Fund manager must ensure that the professional advisers appointed have the appropriate experience, knowledge and expertise to undertake their assigned tasks to the standard required by the directors of the Fund. 4.  In all cases, the directors of the Hedge Fund should undertake sufficient due diligence to ensure that suppliers have the required level of expertise and experience to carry out the roles to the required level.	View Guidance
      HFSB Hedge Fund Standards: Final Report	1.  A hedge fund manager should, where appropriate, do what it reasonably can to enable and encourage the fund to put a service level agreement (“SLA”) in place with relevant service providers (commonly, this will be attached as a schedule to the agreement between the fund and the relevant service provider). 2.  A hedge fund manager should do what it reasonably can to enable and encourage the fund governing body to review the services provided by the relevant service provider against contractual or other agreed standards. 3.  A hedge fund manager, to the extent applicable, should disclose the monitoring procedures in relation to its third party service providers in its due diligence documents or upon request.	View Guidance
      MFA Sound Practices for Hedge Fund Managers	A Hedge Fund Manager should carefully select and monitor any mission-critical, third-party service providers performing key business functions (e.g., prime brokerage, risk monitoring, valuation, or BC/DR functions) for it or any Hedge Fund it manages based on such service provider’s experience with those particular Hedge Fund operations.	View Guidance
      PWG Asset Managers' Committee Report	1.  A Manager should foster positive and cooperative relationships with credit and lending counterparties (including prime brokers, derivative counterparties and other creditors), so that both the Manager and counterparties may adequately assess the risks associated with the relationship. 2.  Commensurate with the scope and nature of the relationship between the Manager and its counterparties, the Manager and its counterparties should agree at the beginning of their relationship as to the types of information and frequency with which it will be provided. 3.  In making disclosures to counterparties, the Manager should be willing to assist counterparties in understanding and interpreting disclosures. 4.  As a general matter, the Manager should consider whether it is appropriate for the level of communication with its counterparties to increase under certain circumstances (e.g., during times of market stress that may affect the fund’s strategies and performance, including during periods of increased volatility or tightening credit terms). 5.  In connection with any disclosures to counterparties, the Manager should consider information about the counterparties’ information barriers and policies regarding the separation of functions generally and consider whether it is appropriate to seek assurance, as part of its counterparty contracts, that financial and other confidential information provided by the Manager is only used for credit evaluation purposes and will not be made available to any member of the counterparties’ trading desk(s) or department(s). 6.  The Manager should negotiate and maintain with its counterparties signed agreements governing the terms of the relationship (e.g., account opening, prime brokerage, stock lending, ISDA and give-up agreements). 7.  The Manager should carefully review the details of the terms of these agreements to understand risks that can affect the counterparty’s obligation to extend credit or provide other services (such as terms that can increase collateral requirements). 8.  Where multiple counterparties are used, the Manager should devote appropriate resources to managing the operations of the fund across those multiple counterparties.	View Guidance
    • 4. Monitoring and Reporting to Board

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	1. Once service providers have been retained, the directors should take reasonable steps to ensure that they formally monitor the performance of each service provider by the use of key performance indicators. 2. There should be clear written escalation procedures between the Hedge Fund manager and the directors of the Hedge Fund to identify and resolve differences in a timely manner, with recommended actions where appropriate, depending on the materiality of the difference. 3. The directors of the Hedge Fund should expect to review a written investment report from the Hedge Fund manager at least quarterly and should consider whether it wishes to have a mechanism whereby the Hedge Fund manager’s appointment is periodically reviewed and confirmed.	View Guidance
      AIMA Offshore Alternative Fund Directors' Guide	1.  The Directors should put in place a structure for the regular review of service providers such as the Fund’s Administrator, prime broker and/or custodian and auditors to ensure their continued competitiveness and effectiveness. 2.  In particular, the Directors should satisfy themselves that the Fund’s auditor is not conflicted by any work for the Investment Manager and that any potential conflict has been satisfactorily resolved.	View Guidance
      HFSB Hedge Fund Standards: Final Report	A hedge fund manager should do what it reasonably can to enable and encourage the fund governing body to review third party service providers properly and regularly.	View Guidance
    • 5. Administrators

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	1.  The directors of the Hedge Fund should select an administrator that has the experience and resources to provide satisfactory services to the Hedge Fund. Specifically, the administrator should have experience in accounting for the instruments and products traded by Hedge Funds with similar investment strategies. 2.  The directors of the Hedge Fund should satisfy themselves that the administrator is capable of pricing the assets of the Fund independently and in accordance with a written asset pricing policy, the terms of which have previously been agreed between the directors and the administrator. 3.  The directors of the Hedge Fund should expect to review a written administration report from the administrator at least quarterly (or at every board meeting) and should consider whether it wishes to have a mechanism whereby the administrator’s appointment is periodically reviewed and confirmed.	View Guidance
      HFSB Hedge Fund Standards: Final Report	1. A hedge fund manager should, subject to obtaining the consent of the fund’s governing body, provide, or do what it reasonably can to enable and encourage the fund's administrator to provide, any agreed information reports to the fund's counterparties in a timely manner. 2. A hedge fund manager should do what it reasonably can to enable and encourage the fund governing body to obtain from the fund's administrator regular reports on compliance with laws and regulations (in particular those relating to anti-money laundering) applicable to activities which are performed by the administrator on behalf of the fund.	View Guidance
    • 6. Prime Brokers

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	1.  The directors of the Hedge Fund should ensure that they and the Hedge Fund manager fully understand and disclose to investors the prime brokerage arrangements and the protections/risks inherent in them. 2.  The directors of the Hedge Fund should expect to review periodically the charges paid to the prime broker and should ask the Hedge Fund manager to comment on the quality of the service being provided. They may also wish to consider whether to implement a procedure whereby the prime broker’s appointment is periodically reviewed and confirmed. 3.  The relationship between the Fund and the prime broker should be set out in a Prime Brokerage Agreement signed by both parties.	View Guidance
      HFSB Hedge Fund Standards: Final Report	A hedge fund manager of a large hedge fund should carefully consider whether it is appropriate for the hedge fund to appoint more than one prime broker (taking into account in particular the potential advantages of diversification of funding and other services) and do what it reasonably can to enable and encourage the fund governing body to act accordingly.	View Guidance
    • 7. Auditors

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	1.  The directors of the Hedge Fund should retain an appropriately qualified external auditor that has experience of Hedge Funds generally and is familiar with the specific types of trading and instruments contemplated by the Hedge Fund manager. The directors of the Hedge Fund should satisfy themselves that the auditor is sufficiently independent. 2.  The relationship between the Hedge Fund and the auditor should be set out in an audit engagement letter. 3.  The directors of the Hedge Fund should monitor the relationship with the auditor and oversee the annual audit process.	View Guidance
      AIMA Offshore Alternative Fund Directors' Guide	1.  It is a standard requirement for a Fund to produce annual and sometimes semi-annual accounts (or financial statements). Annual accounts are then audited by independent auditors. The principle of Directors’ responsibility is not affected by the fact that, more often than not for a Fund, the Administrator rather than the audit firm itself will actually produce the accounts. 2.  It is the Directors’ responsibility to select suitable accounting policies and apply them on a consistent basis, making judgments and estimates that are prudent and reasonable. They are also responsible for ensuring that the financial statements give a true and fair view of the Fund’s state of affairs at the end of the year and of the profit or loss for the year in question. 3.  Auditors are appointed by a Fund (the appointment being approved by its Board of Directors) and are typically re-appointed annually. 4.  The Directors an offshore alternative Fund should be aware that a financial cap on the liability of the auditor for any losses arising out of a failure by the auditor to carry out its duties properly is currently a feature of the audit services marketplace for offshore alternative funds and that, if such a cap is imposed, it should be disclosed in the Fund’s prospectus. 5.  After conducting their audit and before signing the audit opinion, auditors seek a Letter of Representation from the Fund’s Directors as to a variety of matters of a factual and opinion nature relating to the records, systems and situation of the Fund which they have audited. 6.  Particularly as Directors are generally ‘non-executive’ in their role, they will wish to review the accounts and the Letter of Representation carefully as personal liability may attach should the accounts or the representations prove inaccurate.	View Guidance
      HFSB Hedge Fund Standards: Final Report	A hedge fund manager should do what it reasonably can to enable and encourage the fund governing body to appoint reputable auditors.	View Guidance
    • 8. Counsel

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	A Hedge Fund should appoint legal counsel with appropriate expertise in appropriate jurisdictions, including where the Hedge Fund is domiciled and where the Hedge Fund manager is located and operates.	View Guidance
    • 9. Executing Brokers

      Provider	Practice	Guidance
      AIMA Guide to Sound Practices for European Hedge Fund Managers	1.  The Hedge Fund manager should always know the executing broker and the prime broker handling each specific trade. 2.  The approval for opening and maintaining broker accounts should be formally documented.	View Guidance