An Ethically Sound Infrastructure

In late May, the Investor Steering Committee (ISC) of the Alternative Investment Management Association (AIMA) published A Guide to Institutional Investors’ Views and Preferences Regarding Hedge Fund Operational Infrastructure.  The AIMA Guide compiles the views of prominent institutional investors in an effort to help other investors make informed decisions about hedge fund asset allocation.  It comes at a time when the hedge fund industry is attracting an increasingly diversified investor base.

The AIMA Guide provides a focused review of five broad areas of a hedge fund’s structure, each authored by a different member of the ISC. These sections outline how the institutional investor reviews the hedge fund’s structure regarding governance, risk, investments, capital, and operations.  Each section is further distilled into recommendation for subtopics including constitutional documents, liquidity risk, management fee structures, firm ownership, and compliance.

The AIMA Guide makes for beneficial reading for firms looking to comply with the principles of the CFA Institute Asset Manager Code of Professional Conduct.  In fact, many of the topics covered in the AIMA Guide intersect with key principles outlined in the Asset Manager Code, providing companies with additional insights into how savvy investors would size up a hedge fund’s operational infrastructure. For example, the AIMA Guide section on risk provides many recommendations for how a firm would establish and disclose a firmwide risk-management process, one of the key requirements outlined in the Asset Manager Code.

Separately, the publications represent valuable resources to hedge funds.  The AIMA Guide provides the firms some insight into what actual investors are looking for from their infrastructure. Meanwhile, compliance with the Asset Manager Codes allows the firm to demonstrate its commitment to ethical behavior and the protection of investors’ interests.

When used in combination, the publications allow a firm to display an organizational structure grounded in strong ethical principles and investor protection, which we believe is a design for success.