Institutional Investors Stress Skin In The Game, Risk Controls In Hedge Fund Guide

May 31 2011 | 9:19am ET

Several major institutional investors are spelling out what they want from hedge funds in black and white.

The Alternative Investment Management Association today published a guide setting out what that all-important client class expects from its hedge fund managers. And that includes skin in the game, strong corporate governance and risk management, and, in light of the recent scandals in the U.S., measures to prevent insider trading.

Contributors to the guide—described as a reference on "institutional investors' views and preferences" and not as a set of demands—include the California Public Employees Retirement System, Albourne Partners, British Airways Pension Investment Management, Union Bancaire Privée and the Universities Superannuation Scheme. CalPERS hedge fund chief Kurt Silberstein covered hedge fund managers' investment in their own funds.

"It is important that a significant amount of a hedge fund manager's (including the senior team) wealth is invested in the fund(s) that the firm manages," Silberstein wrote. "If the investor does not feel that the hedge fund manager has enough of its own capital invested in the fund, the hedge fund manager should be expected to reinvest a portion of the performance fees in the hedge fund."

Albourne's Adrian Sales, meanwhile, warned that hedge funds should be careful in their dealings with expert networks, currently at the center of a major U.S. Justice Department investigation.

"Staff that work with such consultants should receive special training and compliance should undertake extensive surveillance (e.g., looking for trading spikes, reviewing trade volume around news releases, e-mail searches and recording of telephone calls)," he wrote.

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