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MFA's Sound Practices For Hedge Fund Managers 2007

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Managed Funds Association’s
Sound Practices
for Hedge Fund Managers
2009 Edition
Sound Practices History
• First published in 2000
• Four revisions: 2003, 2005, 2007 and 2009
• New edition incorporates PWG Best Practices Report of Asset
Managers’ Committee
• Heightened standards of excellence to restore investor trust
• Due diligence questionnaire provides tools for investors
• Hedge funds have strong role in helping to restore financial stability and
economic recovery
Global Context
• As G-20 gathers, MFA is taking steps to restore investor
• G-30 Report on financial system stability says:
“The process, to be effective, depends on mutual trust.
Trust based on confidence in the integrity of institutions
and the continuity of markets.”
• MFA now working on unified best practices for Financial
Stability Forum (FSF) due April 30, 2009
Part of MFA’s Global Efforts
• MFA works with IOSCO to develop global standards for portfolio
valuation principles
• MFA works with IOSCO on task forces to prepare for G-20
• MFA works with European Commission, meets frequently with
European Parliament in Brussels
•MFA has met with G-7 Finance Ministers
Objectives of Sound Practices
1) Strengthen business practices of hedge fund industry through a
strong framework of internal policies and procedures
2) Encourage individualized assessment and application of
3) Enhance market discipline in global financial marketplace to
prevent systemic risk
Due Diligence Questionnaire
• Industry commitment to investor protection
• Encourages best practices in communication between funds and
• Provides more detail than offering documents
• DDQ in 3 main sections:
• Investment manager overview
• Overview of activities of investment manager
• Fund information
• More qualitative questions than any
• Seeks details on personnel, service providers, other businesses,
conflicts of interest and investor communications
What’s New in 2009 Edition?
• Represents major overhaul
• Incorporates PWG Asset Managers’ Committee Best
• Vastly comprehensive guidance on responsibilities to investors,
disclosure and investor protection
Seven Major Sections
1) Disclosure and Investor Protection
2) Valuation
3) Risk Management
4) Trading and Business Operations
5) Compliance, Conflicts and Business Practices
6) Anti-Money Laundering
7) Business Continuity/Disaster Recovery
Disclosure & Investor Protection
• Disclosure framework:
• PPM, audited financials, performance, regular
communication with investors
• Material information:
•Scope of fund’s operations
• Responsibilities to investors
• Conflicts of interest
• Participation of Investors
• Disclosure to counterparties
• Valuation framework
• Valuation governance
• Implementation of valuation policies
• Valuation policies and procedures
• Adopt and implement written policies
• Identify responsible person or team
• Identify pricing sources
• Adopt accounting standards (eg GAAP, IFRS)
• Set-up internal documentation
• Establish policies for valuing hard-to-value assets
• Include guidelines on side pockets
Risk Management
• Risk is inherent and essential to returns
• Goal of risk management is not to eliminate risk, but to
understand it and manage it prudently
• Overall approach should include risk profiles for each fund and
appointment of Chief Risk Officer
• Periodic review of risk measurement, monitoring and
management procedures
• Identify categories of risk:
• Liquidity risk
• Leverage risk
• Market risk
• Counterparty credit risk
• Operational risk
• Legal and compliance risk
Trading and Business Operations
• Develop integrated framework to manage trading and operations
• Conduct due diligence on counterparties
• Develop cash management and collateral management
• Select and monitor reputable key service providers
• Develop core infrastructure and operational practices
• Include practices for OTC derivatives and complex products
• Develop and monitor systems for core accounting practices
• Develop and monitor information technology practices
• Seek best execution in trading activities
Compliance, Conflicts, Business Practices
• Establish culture of compliance
• Adopt written Code of Ethics
• Develop written compliance manual
• Train and educate personnel about compliance
• Dedicate resources to compliance and appoint Chief Compliance
Anti-Money Laundering
• MFA’s pioneering AML Guidance first published in March 2002,
following enactment of PATRIOT Act
• Although Treasury has not issued rules, hedge funds should
adopt and implement AML programs
• MFA’s AML Guidance update in 2007
• Guidance now inside Sound Practices (no longer appendix)
Business Continuity/Disaster Recovery
• Establish plan objectives to provide for continuation of essential
operations in event of natural disaster, market disruption, terrorist
attack, loss of key person or business emergency
• Detail mission-critical systems
• Identify personnel to achieve objectives
• Replicate technology systems
• Train and test at least annually
• An oversight person or team should be responsible for
regulatory reporting and compliance
•Create business continuity, contingency and succession
• Plan for crisis management and disaster recovery
• Understand and use government resources as necessary
Managed Funds Association’s
Sound Practices
for Hedge Fund Managers
2009 Edition
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