The financial world is growing more complex as regulations and compliance become more stringent. Corporations continue to look for ways to comply with regulations while maximizing investments, which is no small feat in today's volatile marketplace. Hedge funds are becoming a front-runner for institutional investors because of the high return potential.
Hedge funds are pools of underlying securities. These funds can invest in a wider range of securities than mutual funds because they aren't regulated by the Securities and Exchange Commission (SEC). The downside is that the structure of hedge funds doesn't factor in governance as a component of responsible investing.
As the popularity of hedge funds increases, investors are becoming increasingly concerned that regulators are allowing governance related to hedge funds to continue to take a back seat. Lack of governance or weak governance leaves investors vulnerable to the ills of reputational damage and other negative business impacts.
Industry standards can hold true where regulations fail to exist. A total Enterprise Governance Management System fills the gap in governance for hedge fund investors by giving investment firms the necessary governance structure to reduce risk.
Risks and Hedge Funds
Hedge funds are consistent with the phrase, ''the higher the risk, the higher the reward.'' Hedge funds get their name from the idea that they use a variety of risky strategies to increase gains and neutralize losses as an overall strategy to hedge their investments. Hedge funds use strategies that are uniquely different from mutual funds. Such strategies may include some combination of:- Long-short strategies - buying stocks
- Short positions - selling stocks with borrowed money and buying them back
- Derivatives
- Leverage
Hedge Funds Rising in Popularity
The lack of governance pertaining to hedge funds hasn't been lost on many institutional investors. As hedge funds began enjoying a higher level of popularity, investors have been lobbying individual fund managers and regulators for more consistent governance standards across the globe. A quote on governance and investing by Moody's said: ''Corporate governance practices for hedge fund firms are more closely examined today than at any other time in the history of the industry...hedge funds firms have experienced a shift in their investor composition from high net worth individual investors to institutional investors...Institutional investors have shown that they view the evaluation of governance and oversight as it relates to risk management, valuations, operational controls, transparency and the investment process as important as analyzing a hedge fund manager's investment performance.'' Despite the inherent risks of hedge funds, investors have a high motivation to move funds to hedge funds. Their hesitancy in moving forth with it comes from worries over weak governance. Unfortunately, lack of corporate concern over governance is slowing down the flow of money to hedge funds. Investment firms will need to instill the confidence of investors by assuring them that boards are practicing high standards for governance, including independence, strong oversight, responsible planning and thorough risk mitigation measures. Investors are looking for robust internal governance, as demonstrated by good corporate governance principles such as greater transparency, strong operational policies, improved oversight and monitoring of hedge funds. Investors cite current concerns over lack of voting rights for shareholders and having no mechanism for replacing directors or managers. The current market is creating new opportunities for hedge fund managers to take the lead to help build new relations with the investor community and to elevate the reputation for the alternative investments industry should they choose to exercise them. Regulators and other organizations, such as the Alternative Investment Management Association (AIMA), The Standards Board for Alternative Investments (SBAI) and other associations within the industry, recognize that the standards investors are asking for are neither costly nor complex.Enterprise Governance Management Promotes Stronger Governance for Hedge Funds
Enterprise Governance Management is the discipline of applying technical tools and resources to the full range of governance needs to govern at the highest level and to deliver long-term success and sustainability. Diligent Corporation, with its suite of electronic governance solutions called the Governance Cloud, is the only provider of a comprehensive governance management solution. Diligent gives investment firms the software solutions that support and ensure that corporate processes meet or exceed investors' expectations for exceptionally high governance standards. The Governance Cloud includes cost-effective and efficient electronic tools such as:- Diligent Boards
- Director and officer questionnaires(pre-filled forms)
- Board evaluations
- Resolutions and voting
- Diligent Messenger
- Diligent Minutes
- Insights(curated content and videos)
- Entity Management
Media Highlights
Environmental, social and governance (ESG) issues have become more complex and multifaceted than ever before. At the same time, ESG continues to ascend on board and leadership agendas.
In this buyer’s guide, we explore what a market-leading ESG solution should look like and highlight the key areas organisations should be prioritising as they embark on their search.