Section B - Investment Process and Portfolio Risk Management » 1. Investment Process » 6. Conformity with Investment Strategy/Hedge Fund Mandate

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Provider: HFSB

Practice:	Guidance:
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.	To assist in tracking a fund's adherence to its stated investment objectives, investment policy/strategy and investment and other restrictions, Hedge Fund managers should carefully consider setting internal limits and sub-limits at the outset for the aggregate portfolio and, where applicable, to all individual sub- portfolios (each of which would be subject to override by the Hedge Fund manager's chief executive officer, chief investment officer, management committee or similar). These limits could include general investment restrictions (e.g., eligible asset classes, geographic location of risk) and could also encompass various categories of risk such as market risk, funding liquidity risk, counterparty credit risk and other relevant risk factors such as concentrations (e.g., in relation to single names, sectors or hard-to-value assets). Risk reporting should be put in place so that the investment decision-makers have a daily (or more frequent if appropriate) view of the risk position of the fund and are in a position to prevent breaches of any relevant limits and restrictions. Breaches of any relevant limits or restrictions should be immediately reported to the relevant fund manager, the manager of the trading activity and the compliance officer, with escalation as needed to the manager’s chief executive officer, chief investment officer, management committee or similar. A process for determining when and how breaches should be reported to the fund governing body should be put in place (a manager will want to ensure that such process takes into account insurance related considerations). The process should be designed to ensure that, if required, the findings of the stress testing/scenario analyses are translated into mitigating portfolio risks.

Practice:

Guidance:

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.

To assist in tracking a fund's adherence to its stated investment objectives, investment policy/strategy and investment and other restrictions, Hedge Fund managers should carefully consider setting internal limits and sub-limits at the outset for the aggregate portfolio and, where applicable, to all individual sub- portfolios (each of which would be subject to override by the Hedge Fund manager's chief executive officer, chief investment officer, management committee or similar). These limits could include general investment restrictions (e.g., eligible asset classes, geographic location of risk) and could also encompass various categories of risk such as market risk, funding liquidity risk, counterparty credit risk and other relevant risk factors such as concentrations (e.g., in relation to single names, sectors or hard-to-value assets). Risk reporting should be put in place so that the investment decision-makers have a daily (or more frequent if appropriate) view of the risk position of the fund and are in a position to prevent breaches of any relevant limits and restrictions.

Breaches of any relevant limits or restrictions should be immediately reported to the relevant fund manager, the manager of the trading activity and the compliance officer, with escalation as needed to the manager’s chief executive officer, chief investment officer, management committee or similar. A process for determining when and how breaches should be reported to the fund governing body should be put in place (a manager will want to ensure that such process takes into account insurance related considerations).

The process should be designed to ensure that, if required, the findings of the stress testing/scenario analyses are translated into mitigating portfolio risks.