Four major super funds have joined forces to create a set of principles on how hedge fund managers should operate and manage risk - a move designed to improve investor confidence and stimulate more mandates into the asset class.
ARIA, Local Government (NSW) Super, Media Super and Sunsuper, all of which invest large sums in hedge funds and have total funds of more than $47 billion combined, are behind the initiative.
They are members of the Investor Advisory Committee (IAC) to the Alternative Investment Management Association (AIMA) Australia, the representative body of the hedge fund industry in Australia.
The set of principles are non-enforceable but, if followed, gives a hedge fund manager a better chance of passing due diligence conducted by these four super funds when choosing investment managers.
The principles are split into four key areas: governance, fund operations, business management & operations and risk management.
Issues addressed include handling of base management fees, call for majority independent directors, stringent audits, handling of key-man risk, and more transparent asset valuation practices.
Liquidity and redemption policies were sore points also raised by the committee.
For example, IAC member Craig Turnbull, chief investment officer of Local Government (NSW) Super, said that with one hedge fund investment, they had to wait more than two and a half years to get all their money back.
"It probably tied up more time in our investment committee meetings than any other issues. Trustees get very frustrated over those kind of issues and leaves a sour taste in their mouths over hedge funds in general," he said.
"Good governance and good transparency obviously helps those situations."
Bruce Tomlinson, IAC chair and head of alternatives at Sunsuper said the committee hopes that, over time, hedge fund managers will adopt the principles and work closer with AIMA to raise the operational standards of locally-owned hedge funds.
Meanwhile, David George, director of debt and alternatives at the Future Fund, endorsed the principles and said they would go a long way in fostering a better relationship between the providers of capital and the hedge fund community. According to Rainmaker Research, the Future Fund is the country's largest investor in hedge fund assets with more than $13 billion invested in the sector.
The principles were released at the Australian Hedge Fund Forum 2011 in association with AIMA Australia held in Sydney this week.