Fund governance

Fund governance refers to a system of checks and balances and work performed by the governing body (board) of an investment fund to ensure that the fund is operated in the best interests of the fund and its investors. The objective of fund governance is to uphold the regulatory principles commonly known as the four pillars of investor protection that are typically promulgated through the investment fund regulation applicable in the jurisdiction of the fund. These principles vary by jurisdiction and in the US, the 1940 Act generally ensure that: (i) The investment fund will be managed in accordance with the fund’s investment objectives, (ii) The assets of the investment fund will be kept safe, (iii) When investors redeem they will get their pro rata share of the investment fund’s assets, (iv) The investment fund will be managed for the benefit of the fund’s shareholders and not its service providers.

Offshore investment funds are typically formed as companies in the Cayman Islands (85%). When an investment fund is formed as a company, its governing body is its board of directors. In this context, fund governance is commonly referred to as “fund directorships” or “independent director services”. Offshore funds are commonly structured as a “feeder” funds that will generally invest all monies received directly into a “master” fund.

Onshore investment fund are typically formed as limited partnerships (LPs) in the United States, most commonly in Delaware. These funds typically serve as the “master” fund to the offshore feeder fund. The governing body (board) of the LP is its general partner (GP) which is usually under the sole control and direction of the investment manager or fund sponsor. This structure is increasingly being challenged by institutional investors and other stakeholders to implement more independent governance and investor friendly mechanisms typically in the form of advisory boards or independent GPs or managing members.

Investment funds can also be formed as unit trusts with a board of trustees as its governing body.

The role of fund governance comprises both fiduciary duties and responsibilities owed by the governing body (board). Fiduciary duties are prescribed by the applicable laws of the fund’s jurisdiction and are inviolable. Responsibilities are prescribed through contractual terms in the various fund documents. Fund governance responsibilities can vary widely between investment funds because fund documents are commonly negotiated between fund stakeholders based on their various (often competing) requirements and objectives. Although the objective of fund governance is investor protection, fiduciary duties typically require the board to act in the best interest of a fund taken as whole and not any particular investor.

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Wikipedia