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The MFA’s 2005 Sound Practices for Hedge Funds Managers, MFA, Managed Funds Association, 2005, Free.
The Managed Funds Association has just published the MFA’s 2005 Sound Practices for Hedge Funds Managers. The first version of this document was published in 2000, and was revised in 2003 and again now.It is clearly the result of years of hard work by many experienced, educated and thoughtful men and women. Unfortunately, this document is radically misnamed and misdirected.It is not about practice.It is about what a hedge fund manager must do if he does not want to go to jail and, to a lesser degree, about what some managers have found to be a good idea.If my judgments as a nonlawyer can be trusted, the legal advice is spot on. The practical advice varies from spot-on summaries to recommendations that are, sometimes, not even in the right hemisphere.Take recommendation 1.1: “A Hedge Fund Manager should establish management policies and practices that are commensurate with the size, nature and complexity of the Hedge Fund Manager’s trading activities and the hedge funds it manages.” There are three things wrong with this recommendation.First, it is not a call to action. Among the hundreds of hedge fund managers I know, including a number who are criminally incompetent, I can’t think of one who wouldn’t claim that he is already following this recommendation.
Second, this recommendation places the emphasis on the hedge fund manager and his business, not on the protection of the investor’s money, which is where the emphasis belongs.This recommendation should read: “The Hedge Fund manager will establish management policies sufficient to manage his fund professionally and prudently.The Hedge Fund manager will use the industries best practices—unless he has strong evidence that his own practices are superior.”
Third, this recommendation suggests that the manager do the least he can get away with, which is what a good lawyer should suggest, I suppose. The MFA never suggests doing the most we can do for our investors. Consider, as well, recommendation 2.3: “A hedge fund manager should assess whether its operations or particular circumstances may present potential conflicts of interest and seek to insure that any conflicts of interest that may be material are appropriately disclosed and that controls are in place to address them.” The MFA is big on disclosure, and there is nothing wrong with disclosure.But isn’t it better to engineer the business so that the conflicts of interest do not exist? In my experience, most conflicts of interest can be eliminated.Moreover, when this can be done, both the client and the business benefit. Notice in my example above that I suggest “best practices,” not just “sound practices.”Clearly, going the extra mile means using the best practices available.My proposal has a few fuzzy edges, of course.For example, what constitutes an industry practice and how do you tell which ones are sound, much less which ones are best?Sometimes there are no answers.In which case, the best practice may be nothing better than, “Be careful.”
Best practices. But it is sometimes as hard to miss a best practice as it is to miss a rhinoceros in a bathtub.To its credit, the MFA recognizes generally accepted accounting principles. But, inexplicably, it does not even mention, much less demand the use of, generally accepted auditing standards, modern portfolio theory or any of a number of other clearly non-controversial techniques. To the contrary, the MFA’s stress on sound practices, as opposed to best practices, seems to imply that all or, at least, most opinions are equal.They are not.To use a noninvestment example: consider George W. Bush’s recent comment that schools should expose students to both evolution and “Intelligent Design”.Over the past 100 years, the scientific basis for evolution has been well established. Intelligent design advocates do not have a theory that can be tested, which is to say that they have nothing at all.George Bush’s idea is of no value. Nothing in the science, engineering or practices underlying hedge fund work is as well established as evolution, unfortunately.Still, many of our practices are so well established that hedge fund managers ignore them at their peril.
It’s free, but is it worth it? The MFA’s new document is available free at: www.mfainfo.org.Should you download it and read it?Certainly, the document’s boxed summaries are worth memorizing.As for the rest, well, some valuable material is mixed in with material that is not anywhere near as strong as it should be. Disclosure: The MFA shot down one of my proposals a half dozen years ago. I have probably spoken at one or more of their conferences.After this review, I probably won’t be asked to speak again. To Download the MFA's 2005 Sound Practices Document chick here.
An earlier version of this review was published in MARHedge.
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"If your mother says she loves you, check it out." --Old reporters' motto; also our motto. Copyright (C) 2005, 2006, 2007, 2008, 2009 Fred Gehm. All rights reserved.