Cayman Islands: Post-Crisis – Investors Require Hedge Funds to Shape Up

Last Updated: 13 July 2010
Article by Appleby  

There has been significant discourse over the past eighteen months in response to the recent economic crisis on the need for increased governmental regulation for the hedge funds industry. There have been demands from numerous investor rights groups, governmental, non-governmental and supranational organisations for an increase in the regulation of hedge funds. Much of this discussion has centered around how hedge funds should be better governed, monitored and held accountable to their investors. None of this discourse, however, has taken into account the impact investors, especially institutional investors, have had in making hedge funds shape up.

In the current post-crisis economic climate, investors are becoming increasingly demanding of hedge fund managers and administrators. Lessons have been learnt from the recent collapse which has led investors to pay more attention to the operational aspects of their investments. Two specific ways in which this new investor awareness has impacted upon investment funds include the requirements investors now have for increased transparency and independent valuations.

It is more likely that changes made to the way investment managers and administrators operate hedge funds will be driven primarily by the demands of institutional investors rather than the pontification of policy makers, ministers or regulatory bodies.

Increased Transparency

Although return rates will always be an important factor in comparing investment opportunities, hedge fund managers are increasingly also seeing investors consider transparency as a comparative measure. Investors want greater information on the business dealings, arrangements and agreements between the investment fund and its service providers. There is a growing demand for more transparency on fees, especially those fees linked to performance, and to the payment of any 'soft dollar' items.

A big agenda item for investors in considering investment opportunities is whether there are any 'soft dollar' items included in the fees paid to custodians or prime brokers. Whilst usually glossed over in the relevant offering document, 'soft dollar' items can range from computer software to office facilities and are often not capped. The availability of 'soft dollars' allows administrators and investment managers to charge what would otherwise be standard operating costs to their business to the relevant custodian or prime broker providing the 'soft dollar' items. The lack of transparency on the type of items 'soft dollars' cover and the frequency and availability of them, are a serious concern for investors causing many to require that that no provision for 'soft dollar' items be included in hedge fund documentation.

Issues of transparency also address the extent of communications between investment managers and investors. The type, method and frequency of communications play a central role in alleviating investor concerns. Most importantly, investors want clear and regular communication on any changes in the methods and processes used for the valuation of investments, especially illiquid investments. There is also an increasing requirement for third party confirmations of financial positioning and regular updates on basic financial information such as net asset value, leverage and long-short risk.

Improved communication to investors on fund performance and financial information and a greater understanding of the relationship hedge funds have with their service providers such as custodians and prime brokers are becoming standard demands of astute investors.

Independent Valuations

Historically, valuations of investments that could not be easily ascertained via a third party source such as a stock exchange were delegated to the realm of the investment manager. Valuations of investments such as over-the-counter, hard to value or illiquid investments were often made by the administrator based on information provided by the hedge fund's investment manager. Who better, it was thought, would be in a position to ascertain the value of investments which had no public trade value?

These days, however, investors are cautious of the relationship between the valuation of investments and the payment of performance fees and are seeking a more independent source of valuation. Many industry bodies have responded by publishing best practice guidelines on valuation practices which call for greater transparency, disclosure and the elimination of conflicts of interest in the valuation process by way of utilising multiple valuation sources.

This new investor requirement for independent valuations backed by industry bodies has given rise to a sub-industry within the investment sector of third party independent valuers. These independent valuation agents provide an avenue for investment managers to reassure investors and the general community of the integrity of their investment managers and their pricing and valuation mechanisms.

Additional measures being required by investors include the provision of well-documented and understandable valuation and pricing policies, and in some instances investors require copies of, or input into, these pricing policies prior to considering investment into the fund.

The increasing demand by investors for improved operational standards, higher levels of communication, greater transparency and more appropriate and independent valuation methods are the guidelines which will lead hedge funds out of the current crisis and back into a more stable and sustainable investment era. This, more so than any proposed government regulation, will be the driving force behind improvements to the hedge funds industry.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions