Need to Fill Hedge Fund Board? Look no further than the Caymans
With the boom of hedge funds in the past few years, many funds have placed their legal residence in the Cayman Islands for tax purposes, according to an article in Dealbook titled, "In Caymans, It's Simple to Fill a Hedge Fund Board". If you were to choose this arrangement in the Caymans, they would also require that the fund establish a board there as well. Given the attractiveness of its tax benefits, practically a whole new industry of board members to fill these roles have been proliferating. Directorship costs between $5,000-$30,000 a year for each director, with 9,000 funds existing (although I believe this only constitute US funds). Unfortunately, this doesn't come without problems, such as the value of directors when they oversea over twenty multi-billion dollar hedge funds:
And so is a debate. Major investors and others are starting to question the value of offshore directors, especially in light of recent hedge fund frauds, liquidations and missteps. An analysis of thousands of United States securities filings by The New York Times shows that dozens of directors sit on the boards of 24 or more funds in the Caymans, which individually are supposed to be overseeing tens of billions of dollars in assets. Some hold more than 100 directorships, and one particularly busy director sits on the boards of about 260 hedge funds.
One of the defense by these companies is that not all hedge funds are created equal. Like a doctor who can see 180+ patients a year because not all patients require the same amount of help, a director does not require to give an equal amount of attention to each hedge fund. It's a fair argument, but I'll let you decide its merit. In addition, some of these firms are also hired for legal advice while sitting as directors, which can create a conflict of interests.
There's not doubt that some of these directors for hire are experts in their field, but is it enough to protect investors? Personally, I'm quite dubious, but I will leave you with a quote from The Essays of Warren Buffett: Lessons for Corporate America (pg. 45-46):
Many thousands of investment-company boards meet annually to carry out the vital job of selecting who will manage the savings of the millions of owners they represent. Year after year the directors of Fund A select manager A, Fund B directors select manager B, etc...in a zombie-like process that makes a mockery of stewardship. Very occasionally, a board will revolt. But for the most part, a monkey will type out a Shakespeare play before an "independent" mutual-fund director will suggest that his fund look at other managers, even if the incumbent manager has persistently delivered substandard performance. When they are handling their own money, of course, directors will look to alternative advisers but it never enters their minds to do so when they are acting as fiduciaries for others.
From your knowledge and opinion, can directors be effective if they sit on that (20+) many boards? Do you think they'll require directors to reduce the amount of boards they sit, or nothing will change? If you could, would you work as a director in the Cayman Islands?
Comments
Sitting on 260 boards is just
Sitting on 260 boards is just ridiculous.... even 20+ is excessive but the idea that all funds don't require the same amount of attention is justifiable at that number to some extent.
mogel: Sitting on 260 boards
Sitting on 260 boards is just ridiculous.... even 20+ is excessive but the idea that all funds don't require the same amount of attention is justifiable at that number to some extent.
LOL these guys are just taking the money without doing any due diligence or proposing any advice.
From here it doesn't make any difference that they sit at 2boards or 30+. Actually there is one: monthly cash flow.
There needs to be an
There needs to be an algorithm for choosing BODs for all companies.
IMHO, if you are a top twenty direct investor in any mutual fund, hedge fund, or corporation, and have held your ownership for at least two or three years, you should be *offered* the opportunity to at least sit on the compensation committee and the audit committee. If they have more domain expertise than the average board member, they should also be allowed to sit on the board.
Investors aren't always that smart and shouldn't necessarily interfere in the day to day business of a how something is run, but anyone wise enough to accumulate enough money to be a major holder of anything should be wise enough to have a view on whether management is earning its keep and whether they're getting scammed on the bookkeeping.
Work hard, play hard.
Dude boards of directors
Dude boards of directors rarely do anything substantive for hedge funds regardless of whether they are in the US or in some banana republic. In the hedge fund world if you decide to have a board of directors (most hedge funds dont have one) it is generally a marketing thing...ie if you know a big-name guy he will sign up for your board of directors as a way to vouch for you and that can be very impressive to people and help with capital raise. You pay him some nominal sum and end up having lunch once a quarter, chatting about markets, and gleaning advice but they dont generally provide any oversight like the board of a public company. Certainly they dont go through the books...that is the job of your independent auditors not some 65 year old former hedge fund manager who is friends with the principal.
No doubt this law that hedge funds must have a BOD in the Caymans is set up specifically as a way to extract more money from hedge funds and hook-up guys who are connected down in the Islands. I bet most of these guys who are on 100 boards are all friends of politicans...its just another form of graft.
IlliniProgrammer: There needs
There needs to be an algorithm for choosing BODs for all companies.
IMHO, if you are a top twenty direct investor in any mutual fund, hedge fund, or corporation, and have held your ownership for at least two or three years, you should be *offered* the opportunity to at least sit on the compensation committee and the audit committee. If they have more domain expertise than the average board member, they should also be allowed to sit on the board.
Investors aren't always that smart and shouldn't necessarily interfere in the day to day business of a how something is run, but anyone wise enough to accumulate enough money to be a major holder of anything should be wise enough to have a view on whether management is earning its keep and whether they're getting scammed on the bookkeeping.
+1
This is one of the better ideas I have heard in a while. People talk about rule of law and the quality of the capital markets in the US, SarBox, blah, blah, blah. I meet plenty of management teams and the level of clownery is off the charts at some companies. I can only imagine that BODs are even worse in some cases. Put people with ownership in place and most problems would magically solve themselves. The fact that activist firms even need to exist (and they do) is largely a sign of inefficiency.