Fund governance

Content sourced from Wikipedia, licensed under CC BY-SA 3.0.

Fund governance is a system of checks and balances run by a fund’s board to ensure the fund operates legally and in the best interests of investors. It aims to protect investors through principles often described as the four pillars of investor protection: the fund is managed to its stated objectives, the assets are kept safe, investors redeem their pro rata share, and the fund is managed for shareholders—not for service providers.

Structure basics
- Offshore funds: Commonly set up as companies in places like the Cayman Islands. The board of directors runs the fund (often called fund directorships). Many offshore funds are feeder funds that invest all money into a master fund.
- Onshore funds: Often formed as limited partnerships in the United States (frequently Delaware). The general partner, usually controlled by the investment manager, governs the master fund, which may be fed by offshore funds. There is growing demand for more independent governance, such as advisory boards or independent GPs.
- Unit trusts: Governed by a board of trustees.

Roles and duties
- Directors have fiduciary duties—legal obligations to act in the fund’s best interest as a whole.
- They also have contractual responsibilities laid out in fund documents.
- Fund governance duties vary because fund documents are negotiated to meet different investor needs.
- Unlike many corporations, funds typically don’t employ staff. The investment manager handles day-to-day decisions, while the board monitors performance and adherence to objectives.

Service providers and independence
- Funds hire service providers (auditors, administrators, lawyers, etc.) under contracts. Directors do not control these providers directly, except as allowed by those contracts.
- Governance models range from small boutique boards to professional boards. Professional Board Service Providers (BSPs) offer full-time directors and a firm-style approach, while boutique firms and solo directors are smaller and less resourced.
- In the UK, professional BSPs are required for authorized investment funds. In the US, the SEC requires independent directors to hire staff and advisers as needed.

Why professional governance firms grew
- After the 2008 crisis, demand grew for independent directors who could provide stronger monitoring and expertise.
- Independent research generally supports the professional-firm model: larger, well-resourced boards tend to offer better oversight, training, and use technology to process information quickly.
- Large firms can attract top directors, spread costs, and deliver higher-quality governance.

Key lessons and risks
- The biggest risk is the fund’s investment portfolio, as the investment manager often has substantial authority. Proper independent oversight is crucial.
- Notable cases have highlighted conflicts of interest or breaches of duty when governance failed, which has pushed for stronger, more independent boards.
- Some critics argue against “split” or mixed boards (where directors come from different firms), but research often shows that professional, reputable boards perform better and maintain stronger reputational incentives.

Lead director and board support
- Many boards appoint a lead director to improve efficiency, set meeting agendas, and coordinate with management, counsel, and auditors.
- A lead director who is independent can help ensure the board acts in investors’ best interests and can be the main contact for governance matters.

In short, strong fund governance means independent, well-supported boards with the right mix of skills and resources to monitor managers, protect investors, and ensure the fund sticks to its stated objectives and promises.