MFA Updates Sound Practices For Hedge Fund Managers

by Phillip Morton, Investors Offshore.com

04 August 2005

The Managed Funds Association has released the 2005 Sound Practices For Hedge Fund Managers guide, which updates the previous Sound Practices guidelines published in 2003. In the intervening period, the hedge fund industry has doubled in size to become a $1 trillion industry with a wide range of new financial innovations, strategies, markets and products.

In the 2005 Sound Practices guide, the MFA, a Washington DC-based trade association representing professionals who specialize in alternative investment strategies including members from the world’s largest hedge funds, has expanded coverage on key topics such as internal trading controls, responsibilities to investors, valuation, and risk controls, to ensure that hedge fund managers continue to have useful guidance on issues critical to the evolution of the industry and the integrity of the marketplace.

In addition to promoting sound business practices, the recommendations contained in the 2005 publication are also designed to enhance investor protection while contributing to market soundness. They are divided into seven sections - one more than in the 2003 Sound Practices - and include:

Management and Internal Trading Controls;

• Responsibilities to Investors;
• Valuation Policies and Procedures;
• Risk Monitoring;
• Regulatory Controls;
• Transactional Practices; and
• Business Continuity and Disaster Recovery.

MFA Chairman, Adam Cooper, commented: “MFA’s 2005 Sound Practices tackles timely issues of importance to our members, our industry, and the regulatory community. I am proud of this latest achievement and confident that our work will benefit all interested parties.”

MFA is actively assisting its members to prepare for the SEC’s new rule requiring many hedge fund managers to register with the SEC and as a consequence, new additions to Sound Practices include two appendices that provide a checklist for developing compliance manuals and codes of ethics. The guidance, however, is intended to benefit all hedge fund managers, whether or not they are required to register with the SEC, and reflects the MFA’s belief that the most effective form of industry oversight is self-evaluation combined with the development of strong business practices and solid internal controls.

John G. Gaine, MFA President observed that: “We drafted our recommendations with enough specificity to provide meaningful guidance, but recognize it is impossible to provide guidance suited to all hedge fund managers.”

Stephanie Pries, MFA Vice President and Senior Legal Counsel, who coordinated the MFA effort, added that: “Our latest Sound Practices offer a ‘peer to peer’ perspective for hedge fund managers providing a framework for internal practices and controls. It establishes standards of excellence for single manager hedge fund operations."

“We cover new ground on issues of great importance such as hedge fund manager compliance manuals and codes of ethics, disclosure to investors, best execution and soft dollars,” she noted.

The MFA says that its recommendations serve primarily to educate hedge fund managers, as well as hedge fund investors and those who monitor the industry.

“MFA has developed a strong relationship with the SEC, CFTC and the broader domestic and international financial services policy makers and regulatory community as part of our outreach, and we will share our document with them," continued Mr Gaine.

He added that:

"Notably, our document was recognized last week in a major report on financial stability released by the Counterparty Risk Management Policy Group II (CRMPG II), which indicates the valuable contribution of our Sound Practices to the industry and to those who provide oversight."

“MFA’s 2005 Sound Practices is the latest contribution to our rich legacy of achievements for the hedge fund industry."

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