Governance and disclosure : a standards based approach to the regulation of hedge funds

Abstract

While Malta has recently established a rulebook for the registration of hedge funds and other so-called professional investor funds there is increasing international debate on the degree of regulatory intervention that may be desirable to regulate this growing industry. The subject of this dissertation, is therefore highly topical both in the local and international fora. My dissertation shall firstly analyse what a hedge fund does and the market perception of hedge funds. As with qualified and extraordinary investor funds, hedge funds are by their nature non-retail collective investment schemes, that is, they are not available to the general public. The reason for this being that they present a degree of risk which is higher than normal, they are subject to no investment and borrowing restrictions and are subject to little or no direct regulatory oversight. This makes them unsuitable for the members of the general public. The fact that they are only suitable for professional or sophisticated investors, however, does not mean that hedge funds do not raise basic issues relating to disclosure and conflicts of interest, which shall be dealt with in this proposed dissertation. This dissertation will also seek to address the central issue as to what governance arrangements should be put in place to address conflicts between managers and investors. Issues which will be considered include the role played by managers in seeking to ensure that appropriate governance arrangements are established as from a fund's inception as well as the mitigation of conflicts of interests between managers and investors. Hedge funds have been around since the mid-1900s and their popularity has grown extremely rapidly. There is accordingly no standardised data, and little consolidated publicly available data, about the industry. The industry, however, recognises that managers should be transparent about fees, investment risks and dealings with counter-parties such as lenders and prime brokers. This dissertation proposes to analyse the existing disclosure standards and whether these are sufficient to enable potential or actual investors to make well-informed decisions? It also aims to identify the areas where further disclosures are required? The main issues to be raised will centre on standardisation and the frequency of disclosure. It has been suggested that disclosure, both upfront disclosure and ongoing reporting, should be further standardised to facilitate analysis and comparison between funds. The merits and demerits, if any, of such an approach will also be analysed. On the basis of the above discussion and analysis this proposed dissertation will conclude by determining whether the current professional investor fund rules provide an adequate degree of regulation and the extent to which enhanced governance and disclosure standards may address any limitations in the local PIF rulebook.