ALTERNATIVE INVESTMENT

MANAGEMENT ASSOCIATION
Alternative Investment
Management Association
AIMA’S OFFSHORE
ALTERNATIVE
FUND DIRECTORS’
GUIDE
2nd Edition, 2008
Sponsored by
2
AIMA’s OAFD Guide 2008
INDEX
Foreword 4
1. Introduction 5
1.1 Tax issues 5
1.2 Independent Directors 6
1.3 LocalDirector/Offcerrequirements 6
1.4 How to select and appoint Directors 7
1.5 Terms of appointment 7
1.6 Recommended practice 7
2. TheBoard 8
2.1 Skills, experience, age and other commitments 8
2.2 Directors’ remuneration 8
2.3 Choosing a (standing) Fund Chairman 9
2.4 Whether or not to use sub-committees 9
2.5 Liability 9
3. BoardMeetings 10
3.1 Frequencyofmeetings 10
3.2 Physical vs Telephone Board meetings 10
3.3 Location of Board meetings 10
3.4 Record keeping 11
3.5 Example: Board meeting agenda 11
4. RelationshipbetweentheBoardandInvestmentManager 12
4.1 Matters over which the Investment Manager has discretion and
matters which are reserved to the Board 12
4.2 NatureandfrequencyofinformationsuppliedtotheBoardregarding
performance and subscriptions and redemptions 13
4.3 Policies on key operational issues 13
5. RelationshipbetweentheBoardandAuditors 14
5.1 Supervision and approval of the Fund’s accounts and the audit
process 14
5.2 Liability caps 14
5.3 Letters of Representation 15
6. RoleoftheBoard 17
6.1 Review of investment performance 17
6.2 Monitoring adherence to investment policy and restrictions 17
6.3 Monitoring NAV calculation 17
AIMA’s Recommendations on Governance 18
6.4 Monitoring marketing and investor relations 18
6.5 Anti-Money Laundering (AML) responsibilities 19
6.6 Review of the appointment and performance of other
service providers 20
6.7 Provision of information to shareholders 20
6.8 Compliance with listing rules and continuing obligations 20
6.9 Side letters 21
6.10 Approval of prospectus and constitutional documents 23
6.11 Exercising discretionary waivers 23
6.12 Governance in between formal Board meetings 24
6.13 Use of experts and advisers by the Board and the costs of doing so 24
7. Directors’andOffcers’LiabilityInsurance 25
7.1 General guidance 25
7.2 How to obtain cover 26
7.3 DirectorindemnifcationandD&Opolicydeductibles 27
7.4 Level of cover 27
7.5 Key exposures to consider 29
7.6 Key/problematic exclusions 29
3
AIMA’s OAFD Guide 2008
CopiesoftheGuidewillbeavailableonlyinhardcopy.
AIMA members will receive the frst copy at no charge. Subsequent
copieswillbe£15.
Thecosttonon-membercompaniesis£50.
Prices are exclusive of VAT, where applicable, and postage & packing.
Appendices 32
A Guidance on tax issues: UK, Ireland and the US 33
B SupervisoryCommittee:Swissrequirement 36
C Hedge Fund Board responsibilities 37
D Matters to take into account in respect of annual audit and
accounts 38
E Typical continuing obligations imposed by listing rules 39
F AIMA’s Industry Guidance on Side Letters 41
G CaymanIslandsflingandregulatoryrequirements 44
H AIMA Working Group members 45
I About AIMA 46
J About the Sponsors 47



4
AIMA’s OAFD Guide 2008
FOREWORD
The original Offshore Alternative Fund Directors’ Guide was the initiative of members of AIMA’s Sound
Practices’andAlternativeInvestmentResearchcommitteesin2004.TheGuidewasfrstpublishedinJune
2005 and this revision was updated and re-published in January 2008.
The Guide has three principal audiences in mind, which are, in no particular order of importance:
Investment Managers and promoters of offshore alternative Funds;
Individuals who are considering becoming Directors of an offshore alternative Fund; and
The appointed Board of Directors of an offshore alternative Fund.

The Guide considers the fundamental practical, legal and tax considerations when selecting and appointing
Directors of an offshore alternative Fund (particularly, a Hedge Fund); it explains the basic tasks which Fund
Directors should carry out and suggests ways in which Fund Directors should manage their relationships with the
Fund’sserviceproviders.Itcontainssomedetailastorequirementsandgeneraladviceonseveralimportant
issues, including in relation to review of the annual audited accounts and issues relating to Directors’ and
Offcers’liabilityinsurance.Naturally,thepotentialimpactoftaxationonaFundisanimportant“driver”;
consequently,considerationoftheimpactsoftaxationinvariousspecifcjurisdictionsaffectingtheFund,
service providers and the Directors is included.
The2007revisionoftheGuideaddsrecommendationsonindependenceandconfictsofinterest,Directors’
dutiesandactivecontribution,astoexpensesandmeetingagendaitemsandfduciaryliability.Italsocovers
auditors’ communications and representations to the Board and incorporates detailed recommendations on
valuations, including those contained in AIMA’s Guide to Sound Practices of March 2007, and AIMA’s Anti-
Money Laundering Matrix. The UK FSA’s approach to side letters and AIMA’s Guidance Note on Side Letters are
included and additional guidance on practical considerations concerning liability insurance, key exposures
and any new audit, accounting or regulatory provisions is given. Filing and regulatory requirements in
respect of Cayman Island Funds are also set out in an Appendix.
TheGuidedoesnottakeaccountofanyfundgovernancerecommendationswhichmaybemadeinthefnal
report of the UK Hedge Fund Working Group (due for publication in January 2008). At the time we went
to press with this Guide, the Group’s draft report was still under consultation; given the Group’s draft
recommendations, we do not, however, expect new ground to be covered.
TheGuideisnottobetakenortreatedasasubstituteforspecifcadvice,whetherlegaladviceorotherwise.
It does not seek to provide advice on wider ranging corporate governance issues.
We would like to thank and congratulate the members of the working group (who are listed in AppendixH),
all of whom have volunteered their time and worked extremely hard to produce the original work and this
revision of a valuable Guide. We intend to revise the Guide further as and when developments or additional
material appear.



StevenWhittaker
ChairofWorkingGroup
© The Alternative Investment Management Association Limited, 2007
All rights reserved. No part of this publication may be reproduced in any material form (including photocopying or storing it in any medium by electronic
means and whether or not transiently or incidentally to some other use of this publication) without written permission by the copyright holder except in
accordance with the provisions of the Copyright, Designs and Patents Act 1988 or under the terms of a licence issued by the Copyright Licensing Agency.
Application for permission for other use of copyright materials including permission to reproduce extracts in other published works shall be made to The
Alternative Investment Management Association Limited. Full acknowledgement to authors, publishers and source must be given. Warning: the doing
of an unauthorised act in relation to copyright work may result in both a civil claim for damages and criminal prosecution.
5
AIMA’s OAFD Guide 2008
Introduction
1. INTRODUCTION
Most Hedge Funds which are managed by European Investment Managers are companies incorporated in
offshore locations, such as the Cayman Islands, Bermuda, BVI and the like, or in Luxembourg, Ireland
or the Channel Islands, which do not impose any taxation on the Fund. Factors such as the location of
Board meetings or composition of the Board can, however, affect the Fund’s susceptibility to tax or tax
residence.Taxissuesareimportantforsuchcompaniesbecausethedomesticlawofmosttaxingjurisdictions
specifesthe circumstances inwhich the relevant taxing authorities mayimposetaxation uponcompanies
whicharenotincorporatedinthejurisdictioninquestion.
Forexample,ifanoffshorecompanyweretobetreatedastaxresidentintheUK,itwouldbesubjecttoUK
corporationtaxonallitsprofts,wheresoeverandhowsoeverearned.Itwouldalsobeliabletowithhold
UK income tax from any interest payments. Any company incorporated outside the UK could, in certain
circumstances, become UK taxable.
AstotheUS,anoffshorecompanythathasUStradingactivityusuallyseekstobringitselfwithina“safe
harbour” from taxation which is provided in the US tax regulations. In short, a Fund that trades stock,
securities or commodities for its own account can avoid US taxation on that activity. Exceptions are dividends
andnon-portfoliointerest;thesearesubjecttowithholdingtax.Onechallengingareatodayarisesfromthe
creativitythatmanyFundsponsorsandInvestmentManagersexhibit.Productsnolongerneatlyftintothe
categoryofstock,securitiesorcommoditiesand,therefore,cannotftintothesafeharbour.Suchactivities
riskbeinglabelledastradeorbusinessactivityand,therefore,maybecomesubjecttoUStaxationatfull
UScorporateincometaxrates.Forexample,aFundmaybesubjecttoUStaxoncertainofitsinvestments
in companies or pass-through investment vehicles which operate businesses in the US and are also treated
as partnerships for US federal income tax purposes. In addition, investments in US real property assets or in
entitiesthatinvestprimarilyinUSrealpropertyassetswouldsubjectaFundtoUSincometax.
Further,becausetheoffshorejurisdictionsdonothavetaxtreatieswiththeUSortheUK,theyareconsidered
“taxhavens”fromaUSandUKviewpointandasaresultraiseissuesthatneedtobeunderstood,suchas
withholding taxes, under US and UK law.
Itis,therefore,importantthatanoffshorecompanywhichisincorporatedinataxneutraljurisdiction
does not inadvertently subject itself to taxation in a taxing jurisdiction, thereby imposing an unnecessary
taxburden.
Particular consideration should always be given to the domestic law of the jurisdiction where the Fund’s
Investment Manager is based since this can often increase the risk of causing the Fund to become taxable
inthatjurisdiction.
For illustrative purposes, guidance on when an offshore company would become taxable in the UK, Ireland
or the US is discussed in AppendixA.
Recommended practice for reducing the risk of a successful claim by the UK, Irish or US tax authorities that
aFundhasbecometaxableinoneofthosejurisdictionsisdescribedinSection1.6below.
6 AIMA’s OAFD Guide 2008
Introduction
Best practice for any Fund would be to have a majority of independent offshore Directors and to avoid
appointing Directors who represent the advisers or service providers to the Fund because of the potential for
confictsofinterest.IndependencehasbecomeanessentialelementofaFund’sBoard,fromtheperspective
ofinvestorexpectation.Thisremainstheexpectation,eventhoughthereisnoregulatoryrequirementformost
HedgeFundsorFundsofHedgeFundsunderthelawsofthejurisdictioninwhichtheyareincorporated(e.g.,
Cayman Islands, Bermuda, BVI, Luxembourg and the Channel Islands) to appoint independent Directors.
Note,however,thattherulesofcertainstockexchangesdoimposerequirementsforaminimumnumberof
independent Directors on Funds which seek a listing for their shares.
Any Hedge Fund or Fund of Hedge Funds which seeks a listing for its shares on the Irish Stock Exchange will
berequiredbytheIrishlistingrulestoappointatleasttwoDirectorswhoareindependent.ADirectorwill
be considered independent where (i) he has no executive function with the Fund’s Investment Manager,
investmentadviserandtheiraffliatedcompaniesand/or(ii)hehasanexecutivefunctionwithanyother
service provider but is not responsible for carrying out work on behalf of the Fund. However, consideration
shouldbegiventothepotentialforconfictsofinteresttoarisewithanappointmentofaDirectorwhoalso
representsanadviserorserviceprovidertotheFund(seethefrstparagraphunderSection2.1below).
For a Fund of Hedge Funds which seeks a listing on the London Stock Exchange, the listing rules require,
amongotherthings,thattheFundhasamajorityofindependentDirectors,anindependentChairmanand
a maximum of one Director who is a Director of (or employee of or professional adviser to) the Investment
Manager.
A Fund (or a Fund of Hedge Funds) authorised in an EU Member State, the US, Guernsey or Jersey wishing to
applyforauthorisationforpublicsaleinSwitzerlandwillberequiredbytheSwissauthoritiestoputinplace
a Supervisory Committee – see AppendixB.
Funds incorporatedincertainjurisdictionsarerequiredtoappointoneormorelocallyresidentDirectors.
Suchjurisdictionsinclude:

Otherjurisdictions,suchasMalta,mayhaverequirementstoappointlocallyresidentDirectors.
Funds incorporated in the Cayman Islands, the British Virgin Islands and Luxembourg are not required to
appoint locally resident Directors.
Bermuda: if the Fund is listed on a recognised stock exchange, a Bermuda resident representative is
required;iftheFundisnotsolisted,eitheraBermudaresidentcompanysecretaryandaBermuda
resident representative or one Bermuda resident Director and a Bermuda resident company secretary
ortwoBermudaresidentDirectorsarerequired;
Ireland:twoIrishresidentDirectorsarerequired;
the Isle of Man: one Isle of Man resident Director plus an Isle of Man resident company secretary are
required;and
Jersey:twoJerseyresidentDirectorsarerequired.




7
AIMA’s OAFD Guide 2008
Introduction
Directors are drawn from a variety of sources and skills. When a Hedge Fund is launched, the Investment Manager
or promoter usually identifes and arranges appointment of the initial Directors; they are often personal or
businessacquaintancesoftheInvestmentManager,ormaybeemployedbytheAdministratororbytheInvestment
ManagerorarechosenfromafrmwhichspecialisesinprovidingindependentDirectorstoFunds.However,with
increasedregulatoryandfscalscrutinyofoffshoreFundsandwiderissuesastocorporategovernancegenerally,
there are now far greater expectations of Fund Directors, including independent Directors.
The Directors of a Fund must have the necessary collective expertise to understand the Fund’s trading and the
natureoftheunderlyinginvestments,includingtheirriskprofleandliquidity.Theyneedtohavetheabilityand
experience to evaluate the Fund’s performance and the performance of key service providers.
In light of the potential tax problems associated with telephone attendance at Board meetings, individuals who
are not able or willing to travel to Board meetings on a regular basis (e.g., perhaps because they have too many
other directorships) should not be selected. The Investment Manager or promoter should consider carefully
not only the experience and expertise of a potential Director but also the number of other directorships and
commitments which the candidate has and assess whether he will have the time available to perform his duties
properly. Particular care should be exercised where the potential Director is to be provided by a professional
servicesfrm.Itisnotuncommonforsuchcandidatestohaveseveralhundredotherdirectorshipsandverylittle
time and attention to devote to another directorship.
PotentialDirectorsofaFundshouldalwaysbemindfulofanyactual,potentialorapparentconfictofinterest
and appropriate disclosures should be made to the Fund’s investors and the Board; the Board may then excuse
anyDirectorconcernedfromdiscussionand/orvotingonaparticularsubjectwhenaconfictarises.
The role of a Fund Director is a non-executive one and there will not usually be any service agreement or
formal terms and conditions regulating his responsibilities, although this is becoming more common. Usually,
therearenoprovisionsforanyfxedtenureorforretirementandre-appointment.Thearticlesofassociation
(orequivalent)ofaFundwill,however,usuallyspecifytheeventsorcircumstancesinwhichaDirectormaybe
removedfromoffce.
Taxissueswillnotalwaysbeclear-cut.Thereisinevitablyanelementofsubjectivityandone’s“gutreaction”
as to where a Fund is actually run is often a good guide. However, by adopting the following guidelines, the risk
of a successful claim by the UK, Irish or US tax authorities that the Fund has become taxable in one of these
jurisdictionscanbereduced:
the majority of the Directors and the majority of those Directors attending each Board meeting (or
committee meeting) should be resident outside the UK and Ireland;
the Chairman of the Board or of any meeting should not be a UK or Irish resident;
if the Investment Manager is not based in the US, or is based in the US but does not seek to defer its fees,
themajorityoftheDirectorsandthemajorityattendingeachBoardmeeting(orcommitteemeeting)can
be resident in the US. Accordingly, sensitivity to tax issues may arise if a US manager is deferring fees in
the offshore vehicle;
theBoardofDirectorsshouldhavesuffcientcollectiveexpertiseandexperienceamongitsmemberstobe
in a position to reach reasoned and well-informed decisions on matters relating to the Fund’s investment
policies and strategies;
the Board of Directors should make all strategic decisions affecting the Fund at Board meetings held
outside the UK and Ireland. A UK or Irish resident Director should not make any unilateral decisions whilst
physically present in the UK or Ireland. No meetings should be held in the UK or Ireland when there are UK
or Irish resident Directors;
regularface-to-faceBoardmeetingsshouldbeheld,preferablyquarterly;and
telephone attendance at Board meetings should be avoided wherever possible. When they are held, on
exceptional occasions, the guidance given under Section 3.2 below should be followed.







8
AIMA’s OAFD Guide 2008
The Board
2. THEBOARD
AnyDirectorshouldhavesuffcientandrelevantknowledgeandexperiencetocarryouthisdutiesasDirector.
Heshouldalsobeabletodevotesuffcienttimetocarryoutthosedutiesandthatshouldberefectedinhis
remuneration (see section 2.2 below). Whilst the Administrator (or another service provider) may be willing
to provide one of the Directors, it is better to avoid appointing Directors who represent the advisers or
serviceproviderstotheFundbecauseofpotentialforconfictsofinterest.
There are no hard and fast rules about choosing ‘good’ Fund Directors but the following guidance may be
helpful:
a diversity of skills, experience and backgrounds can be useful in ensuring that key specialist areas
are adequately covered. For example: prior experience on Fund boards and / or of Hedge Funds;
knowledge of the principles of good governance, of current regulatory issues and of industry trends;
an ability to introduce capital; technical knowledge as to the Fund’s investment strategy; knowledge
of accounting and administration; knowledge of valuation and instrument types;
to avoid any misunderstandings, a Director’s expected level of involvement should be explained in
advance.Directorsshouldalsobemadeawareoftheobligationsupontheminthejurisdictionofthe
Fund concerned;
itisimportanttogetthebalancerightbetweenDirectorswhomaybeaffliatedwiththeInvestment
Manager and independent Directors. The Investment Manager may wish to control the Board but
should not do this at the expense of leaving the independent Directors feeling disenfranchised or
outnumberedorofjeopardisingtheoffshoretaxstatusoftheFund;
‘trophy’ Directors who are too busy to contribute effectively should be avoided as this undermines
Board effectiveness;
the Directors should be able to make a meaningful contribution and add value to Fund operations;
Directorsshouldbeproactive,prepareformeetingsinadvance,raisequestionsorseekreportson
areas which concern them;
Directors should make their own assessment of risk and risk mitigation – i.e., as to how they are
managing the risks perceived through delegation, controls, procedures, etc; and
delegation without oversight is not effective – all delegated activities need some level of periodic
upward reporting to the Board.








It is recommended that Directors should:
settheirowncompensation,toavoidpotentialconfictsinhavingitsetbytheInvestmentManager
they oversee; and
have the power, in appropriate circumstances, to hire their own lawyer to advise them (paid for out
of the Fund’s assets).


Currently, the typical remuneration ranges from very low (e.g., $5,000 p.a.) to approximately $15,000 p.a. or
more.SomeprofessionalDirectorsmayaskformore.Remunerationmaybelowerinoffshorejurisdictions
andhigherinEuropeanjurisdictionssuchasIrelandandLuxembourg;€10-20,000maynowapplyinIreland.
Where there are ‘umbrella funds’ within a Fund of Hedge Funds, a basic fee with an additional fee for
each sub-fund may apply. Directors should also be entitled to claim reasonable expenses; if they travel
a considerable distance to attend meetings, they may have the right to claim travel and accommodation
expenses and may also receive an ‘attendance fee’, as compensation for time otherwise wasted in travel.
Factors to be taken into account in setting remuneration include the likely demands on a Director’s time, the
nature of the role and responsibilities and the Director’s skill and experience.
9
AIMA’s OAFD Guide 2008
The Board
TypicalrequirementsofFundDirectorsmightbe:
attendanceatquarterlyBoardmeetings,withsetagendaandwrittenpaperscirculatedinadvanceof
the meeting, to allow proper preparation time;
such meetings will review and approve annual audited accounts (unless there is an audit committee,
which will report to the Board, which may approve accounts and associated documentation and
review and approve semi-annual accounts;
further, specially convened meetings for discussion of “one-off” matters - e.g., nominations of
additional or replacement Directors, changes to service providers’ contracts or to the prospectus.



For further details of the role of a Director, see Section 6.
If the Investment Manager is located in the UK, the Chairman, if one is appointed, should not be a UK
resident. Otherwise, it is usually for the Board to decide who is Chairman.
Somejurisdictions(e.g.,Bermuda)requiretheChairmantobenamedintheprospectus.
There is no obligation on a Board to create any sub-committees. However, there may be circumstances when
mattersmaybebetterormorequicklydealtwithbythecreationofsmaller,specialistdecision-makingsub-
groups. For example, a Board might choose to create sub-committees in the following areas:
audit;
the process of granting discretionary waivers; and
pricing/valuation.



Anysub-committeesshould,however,beformallycreatedwithwrittentermsofreferenceratifedbythe
Board. All proceedings and decisions of sub-committees should be formally reported to the Board and fully
ratifedbyresolution.
In determining the membership of sub-committees and where any meetings are held, the Directors must be
mindful of all comments elsewhere in this Guide relating to taxation and the exercise of central management
and control.
ThematteroffduciaryliabilitywilloftenneedtobeaddressedwhenattractingDirectors.SeeSection7of
thisGuidewithregardtoDirectors’andOffcers’liabilityinsurancecoverandtheissueofindemnifcation.
10
AIMA’s OAFD Guide 2008
Board meetings
3. BOARDMEETINGS
BoardmeetingsshouldbeheldsuffcientlyfrequentlysothattheBoardiseffectivelyabletocarryoutitsrole
(as to which, see Section 6 below) and so that relevant guidance on the broader tax issues is complied with
(see Section 1 above and AppendixA).
ThefrequencyofBoardmeetingsneededtoenabletheBoardtoperformitsroleeffectivelyisultimatelya
matter for each Board to decide in light of its duties. However, relevant guidance on broader tax issues must
betakenintoaccount.Forexample,wheretheFundhasaUK(or,totakeatleastoneotherjurisdiction
applying similar tax restrictions, an Irish) Investment Manager or Director, it is recommended that the Board
oftheFundshouldmeetquarterlyoutsidetheUK(orIreland)inordertoreducetheriskthattheFundcould
become taxable in the UK (or Ireland).
It is acknowledged that it is not always possible for an individual to travel to every face-to-face Board
meeting and on some occasions a Director may wish to participate by telephone.
From a practical perspective, Board meetings which are attended by telephone tend not to be as effective as
meetings which are attended physically by the Directors.
Relevant guidance on the broader tax issues must also be taken into account. For example, from the point
ofviewofavoidingUKorIrishtaxresidence,thefollowingrequirementsshouldbecompliedwithwherethe
relevant Director is a UK or Irish resident:
a UK or Irish Director’s participation by telephone (from the UK or Ireland) must be avoided unless the
BoardmeetingwouldnotbequoratewithouttheparticipationofthatDirector;
Board meetings by telephone should not be chaired by a UK or Irish resident Director;
the Directors physically present at the meeting must themselves have the necessary experience and
ability to make decisions on the Fund’s business affairs;
the telephone call should be initiated from the Board meeting rather than by the UK or Irish resident
Director or, where a conference call facility is used, it should not be arranged from the UK or Ireland;
and
written Board minutes should be taken at each meeting and be signed outside the UK or Ireland by
the meeting’s Chairman.





Where a Fund holds regular Board meetings to discuss various issues from time to time, it may not be
detrimental if one meeting is held at which the Director attending remotely by telephone is the most
experiencedinrelationtotheparticularissueinquestion,althoughitisalwaysdesirabletoavoidthiswhere
possible.
ItisoftenthecasethatoffshorejurisdictionsdonotrequireanyBoardmeetingsforacompanyincorporated
inthatjurisdictiontobeheldinanyparticularlocation–forexample,aCaymanIslandsincorporatedFundis
notrequiredtoholdanyBoardmeetingsintheCaymanIslands.
In practice, due to a mixture of travel, cost and convenience issues, the Boards of offshore Funds do not meet
intheirjurisdictionsofincorporationeitheratalloronaregularbasis.WhereanoffshoreFund’sBoard
chooses not to meet in the jurisdiction of incorporation of the Fund, it is strongly recommended that the
Board avoid holding meetings regularly in any single jurisdiction and it should, as a general rule, hold
Board meetings in many different jurisdictions so as to reduce the risk of the Fund becoming taxable in
anyoneofthosejurisdictions.
11
AIMA’s OAFD Guide 2008
Board meetings
In no circumstances should a Fund’s Board meet in the UK or Ireland because of the risk that the tax
authority in either jurisdiction might deem the Fund to be taxable within it. The Board should not meet
atallinthosejurisdictionswherethereareUKorIrishresidentDirectors.
Both for general corporate governance reasons and having regard to relevant guidance on the broader tax
residence issues, the documents and records (including minute books) for the Fund should be kept outside
thejurisdictioninwhichtheInvestmentManagerisresident.
These are typical matters which might be considered at Board meetings:
approveandsign(whererequired)theFund’ssemi-annualaccounts;
approve and sign the Fund’s annual accounts and the audit process;
review investment performance;
review and approve valuation policy (or revision thereof);
review adherence to investment policy and restrictions;
review any issues regarding NAV calculation;
review marketing and investor relations;
review ERISA/Pension Plan asset status of the Fund, or risk that this will be achieved, where there
are US investors;
exercise discretionary powers – e.g.,
- to accept subscriptions below minimum
- to accept redemptions at short notice
- to waiver an early redemption fee
-toapplyany“gate”;
reviewandapprovalofsideletterrequests;
review compliance with listing rules and continuing obligations;
review compliance with regulations applicable from time to time (for example, the EU Savings Tax
Directive (the Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form
ofinterestpayments),MiFIDandtheUS“newissues”and“softdollar”rules);
receive and review reports from the Investment Manager, the Administrator and the custodian/prime
broker;
approve and sign the audit engagement letter and the audit management representation letter;
obtainandreviewadequacyofsupportingcomfortrepresentationlettersfromdelegates;
approverenewalofDirectors’andOffcers’LiabilityInsurance;
review need for prospectus and other documents to be updated;
review Anti-Money Laundering compliance by the Administrator;
review the appointment and performance of the Administrator, auditors and other relevant service
providers; and
updates on matters of regulatory, accounting, audit or industry importance which may impact on the
Fund.




















12
AIMA’s OAFD Guide 2008
Relationship between the Board and Investment Manager
4. RELATIONSHIPBETWEENTHEBOARDANDINVESTMENTMANAGER
The Investment Manager will, for legal purposes, often be treated under the laws of its jurisdiction as a
fduciaryoftheFund(e.g.,thisisthecaseforUKbasedInvestmentManagers).Asaresult,theInvestment
Manager may owe several duties to the Fund, including:
a duty of good faith;
adutytoavoidconfictsofinterestbetweenitselfandtheFund,aswellasbetweentheFundand
other clients of the Investment Manager; and
adutynottoproftsecretlyfromtheFund.



ThescopeofanyfduciarydutiesowedbytheInvestmentManagertotheFundwillbebasedonthescope
oftheInvestmentManager’srole.Asaresult,theInvestmentManagementAgreement(“IMA”)andrelated
documentation of the Fund (e.g., the prospectus) will be of primary importance. The informed consent of
the Fund, as evidenced either in the IMA or otherwise (e.g., by Board action) would be a defence to a claim
thatsuchfduciarydutieshavebeenbreached.Incertainrespects,theFundandtheInvestmentManager
may limit the scope of these fduciary duties by mutual agreement, although such limitations should be
explicit and unambiguous.
Inadditiontofduciaryduties,anInvestmentManagermayalsohaveotherobligationstotheFundforwhich
claims may be made in case of breach. These could include causes of action for:
negligence;
misrepresentation; and
breach of contract.



The Board’s ongoing review of the Investment Manager’s performance will necessarily include an evaluation
ofwhetherornotthesedutieshavebeenfulflled.
Matters in which the Investment Manager has discretion should be determined by the IMA, which is put in
place between the Fund and the Investment Manager. The Investment Manager needs discretion for day-to-
day investment activity, dealing, portfolio construction and risk management/control of the Fund.
TheBoardisresponsibletotheshareholdersforensuringthattheFundadherestoitsinvestmentobjectives
and restrictions. Thus, regular reporting to the Board is essential to enable the Board to determine whether
theInvestmentManageriscontinuingtoactwithinitsinvestmentmanagementparametersandthatno“style
drift”hasoccurred.
Whilst it is the Fund which will have contractual agreements with the prime broker and Administrator, it is
the Investment Manager who will deal with those parties on a day-to-day basis and, as such, it should be the
Investment Manager’s responsibility to inform the Board whether those contractual relationships are working
effectively. It remains, however, the Board’s duty to satisfy itself that all contractual service relationships are
properlyworkingandtheserviceprovidersshouldreceiveregularreportsoftheBoard’smeetings(quarterly,
at least), which review the service and detail any errors or problems arising. For Swiss funds or UCITS
(Undertakings for Collective Investment in Transferable Securities), such reports should be made monthly.
Some Funds have a separate class of founder shares, which confer certain exclusive voting rights on the
holder and which are, typically, held by the Investment Manager or an offshore management entity related
to the Investment Manager. The Directors should be aware that:
auditorsmayberequiredtoconsolidatetheaccountsoftheholderofthefoundershareswiththose
oftheFundiftheyprovide“control”oftheFundforaccountingpurposes;and
exclusive voting rights must be disclosed in the prospectus.


13
AIMA’s OAFD Guide 2008
Relationship between the Board and Investment Manager
TheBoard’sinformationrequirementswilldependontheparticularstrategyoractivitiesoftheFund.Inall
cases, such information should include copies of all information that is provided to investors (usually monthly
orquarterlynewsletters),togetherwithkeydocumentsfledonbehalfoftheFundwithregulatoryagencies
andexchanges.ThisinformationshouldbeexpandedatquarterlyBoardmeetings,toincorporateamore
detailedexplanationbehindanyperformanceorvaluationfgures.
The future prospects for the Fund are also a responsibility of the Board. To monitor this, they will need
information on subscriptions, redemptions and business development strategies (typically the responsibility
of the Investment Manager, under the IMA, or of a third party distributor, under a separate distribution
agreement).
Intermsoffrequencyofinformation,subscriptionsandredemptionsshouldbereportedatregularquarterly
Board meetings. Subscriptions and redemptions information should also be reported at any special Board
meetingwhichoccursatacriticaltimefortheFundwhereredemptionrequestshavebuiltupandwouldhave
a considerable impact on a particular dealing day. Examples of such circumstances could include:
subscriptions made at about the time the Fund is due to close (to new subscriptions);
ERISA/pension plan assets that may have an impact on current investors; and
largeredemptions,whichcoulddestabilise/affecttheliquidity“gate”.
1
2
3
Redemptioninformationisparticularlycriticalforfundsinvestinginlessliquidassetsorstrategies.
Many of the key operational issues for which the Board has responsibility will either involve the actions of
the Investment Manager or will be dependent on information provided by, or sourced from, the Investment
Manager. These should include but not be limited to:
delineation of functions. Again, it must be noted that a UK Investment Manager cannot be seen to be
taking material policy decisions (as opposed to day to day portfolio management decisions) on behalf
oftheFundintheUK.Therefore,theDirectorsneedtobeprovidedwithsuffcientinformationto
enable them to take overall responsibility for establishing and overseeing the Fund’s investment
policies and strategies;
compliancewithstockexchangelistingrequirements;
review of the Investment Manager’s functions and of any developments within it (and any potential
impact on the Fund);
regulatory compliance by the Investment Manager and the reporting of any breaches of limits;
parameters for variations of risk controls; internal risk controls will vary from time to time, despite
being within the limits set in the Fund prospectus; and
reportinganychangeswhichmayleadto“styledrift”.






Assessing the performance of the Investment Manager is an ongoing responsibility of the Board, to be carried
out at every Board meeting. Such an exercise is, in large part, a forward-looking exercise. As such, the
Board’s decision should not be based solely on past performance. Consideration must also be given to such
related factors as:
theexpertiseandskillofthespecifcindividualswithintheInvestmentManagerresponsibleforthe
Fund; and
the resources and commitment of the Investment Manager provided to the Fund.


14
AIMA’s OAFD Guide 2008
Relationship between the Board and auditors
5. RELATIONSHIPBETWEENTHEBOARDANDAUDITORS
ItisastandardrequirementforaFundtoproduceannualandsometimessemi-annualaccounts(orfnancial
statements). Annual accounts are then audited by independent auditors. The principle of Directors’
responsibility is not affected by the fact that, more often than not for a Fund, the Administrator rather than
theauditfrmitselfwillactuallyproducetheaccounts.
It is the Directors’ responsibility to select suitable accounting policies and apply them on a consistent basis,
makingjudgementsandestimatesthatareprudentandreasonable.Theyarealsoresponsibleforensuring
thatthefnancialstatementsgiveatrueandfairviewoftheFund’sstateofaffairsattheendoftheyearand
oftheproftorlossfortheyearinquestion.
In practice, the Directors delegate responsibility for maintaining the Fund’s books and accounts and the
preparation of year end accounts to the Administrator and, to this end, the Directors may wish to seek an
appropriate letter of comfort from the Administrator.
Someaccountingstandardsorlocallegislation,suchastheUK’s,requiretheinclusionofaspecifcsection
on“StatementofDirectors’responsibilitiesinrespectoftheaccounts”.Attheveryleast,standardaudit
reportsusewordingtotheeffectof:“TheseaccountsaretheresponsibilityoftheFund’smanagement;our
[theauditors’]responsibilityistoexpressanopinionontheseaccountsbasedonouraudit.”
Auditors are appointed by a Fund (the appointment being approved by its Board of Directors) and are typically
re-appointed annually. Their terms of appointment are governed by a Letter of Engagement (L/E), which
typically sets out a wide variety of matters, including limitation of liability on the part of the auditors.
When considering the appointment of auditors, the Directors should take into account the time frame for the
provision of audited accounts, the necessity for any additional tax reporting (e.g., PFIC or K1s for US taxable
investors), fees, liability caps and whether (as is the case for Cayman Islands incorporated funds) additional
signoffbyauditorsintheFund’sjurisdictionofincorporationisrequired.
Auditors are required by auditing standards to communicate certain matters with “those charged with
governance”.Thesematterscoversuchareasasindependence,changesinaccountingpolicies,goingconcern
issues, material misstatements, etc. These communications may be oral or in writing. It is considered good
practice for auditors to present their audit plan to the Board in advance of the audit work commencing.
In addition, auditors usually present their audit fndings to the Boardfollowingthe audit, as the fnancial
statements are being approved.
Examples of matters which a Board may wish to take into account in relation to the annual audit and report
production process are included in AppendixD.
The letter of engagement of the auditors to a Fund incorporated in an offshore jurisdiction, such as the
CaymanIslands,willusuallycontainaprovisionwhichimposesafnancialcapontheliabilityoftheauditor
for any losses arising out of a failure by the auditor to carry out its duties properly. The level of such a
fnancial cap is typically a multiple of the annual audit fee or, alternatively, a relatively small monetary
amount. The Directors of such a Fund should be aware that this is currently a feature of the audit services
marketplace for offshore alternative funds and that, if such a cap is imposed, it should be disclosed in the
Fund’s prospectus. This issue is often the subject of negotiation between the Board and the audit frm;
accordingly, the outcome might vary from situation to situation.
The auditors of Funds incorporated in certain other jurisdictions, such as Ireland for example, are not
permitted to impose such a liability cap in their letter of engagement with the Fund since this is prohibited
by applicable rules in the Fund’s home state.
15
AIMA’s OAFD Guide 2008
Relationship between the Board and auditors
After conducting their audit and before signing the audit opinion, auditors seek a Letter of Representation
(L/R) from the Fund’s Directors as to a variety of matters of a factual and opinion nature relating to the
records, systems and situation of the Fund which they have audited. The content of L/Rs will often vary as
betweenauditfrms,betweenjurisdictionsandfromyeartoyearandaccordingtothenatureoftheFundand
applicable audit standards; matters typically covered, however, will include but are not limited to:
an acknowledgement of responsibilities;
belief that the accounts are fairly presented;
a representation that all the appropriate books and records have been made available;
a representation that all material transactions have been properly recorded;
anacknowledgementofresponsibilityforestablishingandmaintainingadequateinternalcontrols;
ownership of the Fund’s assets;
thattheinvestmentsandotherfnancialinstrumentsarevaluedinaccordancewiththecriteriaset
out in the Fund’s prospectus;
representation that all related party transactions have been disclosed;
representation that all contingent liabilities have been made known to the auditors;
astatementofunadjusteddifferenceswhichtheDirectorsapproveasimmaterialforrestatementof
thefnancialstatements;and
management’s responsibility for assessing fraud risk.











Particularly as Directors are generally ‘non-executive’ in their role, they will wish to review the accounts
and the L/R carefully as personal liability may attach should the accounts or the representations prove
inaccurate. Such a review might focus on several areas:
contents of the accounts, particularly as to: the auditors’ report, to ascertain whether the auditors
have expressed an unqualifed opinion; the schedule of investments, to ensure no breaches of
investment restrictions, as outlined in the prospectus, have occurred and that the Fund is following
its documented investment mandate; liquidity checks and any changes or matters of signifcance
which have arisen in the period;
content of the L/R, particularly identifying any areas where the Directors might wish to seek
limitations (see below) or obtain comfort;
a ‘representation comfort letter’ from the Fund’s Administrator, particularly as to all matters within
the latter’s knowledge or control (which in practice will be many items);
the availability and content of a similar ‘representation comfort letter’ from the Fund’s Custodian,
if there is one;
good practice would be to ensure that each set of accounts, the L/E (where applicable, as it may
not be reissued every audit) and L/R are submitted to all Directors contemporaneously so as to give
eachDirectorsuffcienttimetoreviewthecontentsandincontext.Auditandaccountsproduction
timetablescanoftenbecomequitetight,soanadequateDirectorreviewperiodshouldbebuiltinto
the timetable at the outset; and
where the accounts have been reviewed by the Investment Manager or Administrator (both of whom
would normally be expected to be closely involved), the relevant service provider should be asked
tohighlightfortheDirectorsanymattersofsignifcancearisingduringtheyearandtoprovidean
explanationofanyqueriestheDirectorsmayhave.






16
AIMA’s OAFD Guide 2008
Relationship between the Board and auditors
Briefy,whenconsideringhowDirectorsmayacceptorlimittheirownresponsibilityundertheL/R,theymay
wish to consider these factors:
the Directors of a Fund are almost invariably non-executive but this would never absolve them from
overall responsibility for the preparation and accuracy of the accounts;
a Fund is often required by regulators or stock exchanges (such as the Irish Stock Exchange), by
professional investors themselves and/or by good practice, to appoint independent professionals to
carry out certain functions, such as administration and custody;
evenifsuchappointmentwerenotrequired,thespecialistnatureoftheskillswouldoftenmakethis
a practical necessity;
due diligence should be adopted by or on behalf of the Directors in respect of the relevant professionals,
both in their selection and the ongoing performance of their duties (see Section 6 following);
representation may be sought by the Directors from those relevant professionals, as to the delegated
areas covered;
the professionals so appointed are not mere delegates (as the appointment of a mere bookkeeper
would be) but are independent contractors acting in a professional capacity. There should be some
refectionofthatfactintheL/R–i.e.,providedtheyhaveexercisedduediligence(whichmayinclude
the seeking of a separate representation comfort letter from the professional concerned), to ask non-
executive Directors to take unqualifed responsibility would often be unreasonable.This approach
willassistinrefectingappropriatelyintheauditprocessanddocumentationtheresponsibilitiesof
the Directors and those of such others; and
auditpracticemaydifferinsomejurisdictions,mainlyarisingfromdifferencesbetweenaccounting
standards, audit standards, or fund law, regulation and practice (and therefore auditors’ assessment
of their risk and responsibility).







Therecansometimesbeanadditionalauditorrequirementforsomeoftherepresentationstobegivenbythe
Investment Manager, which may or may not be appropriate as the Investment Manager is in a different position
from the Directors. If representations are needed by the auditor from the Administrator or Investment
Manager and are thought appropriate, they should be tailored to their knowledge or role.
17
AIMA’s OAFD Guide 2008
Role of the Board
6. ROLEOFTHEBOARD
This is arguably one of the most important functions of the Board because good investment performance by
the Investment Manager is the key deliverable as far as the investors are concerned. In practice, the Board
willrelyontheAdministratortoreportontheperformanceofeachshareclass,intermsoffguresandit
will expect copies of all investment reports sent to investors by the Investment Manager, who should report
totheBoardforeachofitsquarterlymeetingsastototalperformance,marketconditionsandanyproblems
encountered;suchreportswillexplainhowtheperformancewasachievedandwhatriskproflewasadopted
to generate returns. The Board will also want to understand how the performance compares both with the
Fund’sinvestmentobjectiveandwitharepresentativesampleofpeermanagers.
EveryFundisrequiredtostateitsinvestmentpoliciesandrestrictionsinitsprospectus,makingcurrentand
prospective investors aware of the types of investments the Fund may make and the goals it is trying to
achieve. The Directors’ role is to monitor the Fund to see that it complies with its stated investment policies
and restrictions.
The periodic monitoring of compliance with the Fund’s investment policies and restrictions will, however,
either fall to the Fund’s Investment Manager or Administrator. The Directors should, therefore, ask the
Fund’s Investment Manager or Administrator to produce a report on the Fund’s compliance with its stated
investment policies and restrictions for consideration at each Board meeting.
The Board of Directors has ultimate responsibility for the valuation of the Fund. They delegate this
responsibility to either an Administrator or to the Investment Manager; it is market practice for European
and offshore Funds (i.e., most non-US Funds) to have valuation delegated to an Administrator – only in very
specifcandexceptionalcircumstancesshouldtheInvestmentManagerhaveresponsibilityforvaluation.
Documented pricing procedures should be approved by the Board in advance of the Fund’s launch and should
be disclosed in the Fund’s prospectus.
The Investment Manager and the Administrator must also ensure compliance with the valuation provisions
disclosed in the Fund’s prospectus. However, another very important function of the Investment Manager
and the Administrator where valuation is concerned is to communicate with the Board on valuation issues
regularly.Aformalisedprocessforreportingvaluationissues(forexample,stalepricing,liquidity,diffcult
tradingmarkets,illiquidassets,sidepocketsorsubjectivity)totheBoardandanyValuationCommitteeona
regularbasisshouldbeputinplace.ThisallowstheBoardtodelegatetheresponsibilitybutalsotofulflthe
requirementthatthereisadequateoversightandsupervision.
AIMA’s “Guide to Sound Practices for Hedge Fund Valuation” (March 2007) makes 15 recommendations in
respect of Hedge Fund valuations - as to governance, transparency, procedures, processes and systems and
sources, models and methodology.
As AIMA’s Guide says, a clearly stated Pricing Policy, together with clearly stated procedures, should be agreed
between the Board, on behalf of the Fund, the Auditors, the Investment Manager and the Administrator and
it should be signed off by the Board, the Investment Manager and the Administrator. A basic summary of
that agreed document should be incorporated into the offering document and the document itself should
be included in the list of contracts, agreements and other documentation which investors may review. The
pricing document should also be referred to within the Administration Agreement and it is probably helpful
to attach it as an Appendix to that agreement.
18
AIMA’s OAFD Guide 2008
Role of the Board
The 4 recommendations in relation to governance (the focus of this Guide) are reproduced below but it
should be noted that they are not intended to represent a comprehensive or prescriptive set of rules. Rather,
they are intended as principles-based guidelines for valuation sound practices.
In advance of the Fund’s launch a summary of practical and workable valuation practices, procedures
and controls should be enshrined in a Valuation Policy Document and approved by the Fund’s Governing
Body (typically, the Directors), after consultation with relevant stakeholders. The Valuation Policy
Document should be reviewed on a regular basis by the Governing Body.
The Valuation Policy Document should explicitly clarify the role of each party in the valuation process,
should identify price sources for each instrument type and should include a practical escalation or
resolution procedure for the management of exceptions.
TheGoverningBodyoftheFundshouldensureadequatesegregationofdutiesintheNAVdetermination
process, which may be achieved by delegating the calculation, determination and production of the
NAV to a suitably independent, competent and experienced Valuation service provider (typically, the
Fund’s Administrator). If the Investment Manager is responsible for determining the NAV, and/or acts
astheFund’sGoverningBody,robustcontrolsoverconfictsofinterestshouldbeestablished.
Oversight of the entire valuation process and, in particular, resolution of pricing issues associated
withhard-to-priceilliquidpositionsandexoticinstrumentsremainstheultimateresponsibilityofthe
Fund’s Governing Body.
1
2
3
4
In terms of new business activities, the Directors should make themselves aware of the overall plans that the
Investment Manager, and any distributors it has appointed, have to promote the Fund. The Directors should
also be aware what the target client base is, what the capacity of the Fund is and what restrictions may or
maynotapplyonmarketingincertainjurisdictions.Areportshouldbeavailablequarterly,summarisinggross
and net subscriptions, so that the size of the Fund against its theoretical capacity can be monitored. Once a
year, the Directors should ask for a new business presentation by the Investment Manager to ensure that the
proposition to the investors is aligned with the description of the Fund contained in the prospectus.
In terms of relations with existing investors, a summary of shareholder correspondence should be provided
quarterlybyboththeInvestmentManagerandtheAdministrator/TransferAgent,highlightingkeyissuesbeing
raised so that the Board is aware of common themes such as concerns about performance or concerns about
effcientadministration.ItisadvisablefortheDirectorstobeawareofthesizeoftheshareholderbaseand
how it breaks down by type of investor.
19
AIMA’s OAFD Guide 2008
Role of the Board
AML laws and regulations are detailed and technical in nature and have evolved and changed considerably
overthelastseveralyearsinanumberofjurisdictions.AdetailedexplanationofAMLlawsandregulationsis
beyondthescopeofthisGuideexcepttonotethatthereisnoonesetofAMLcompliancerulesthatsatisfes
theneedsofalljurisdictions.AIMAhaspublishedanonlineAML‘Matrix’whichreviewstherequirementsin
anumberofjurisdictions.
The recommendations of good practice for Boards of Directors in this context are as follows:
TheBoardshouldunderstandthenatureoftheAMLrequirementswhichapplyinrespectoftheFund
and whether responsibility for implementing the necessary procedures has been delegated, as will
often be the case, to the Administrator or the Investment Manager.
The Board should obtain regular feedback from the Administrator or Investment Manager, to ascertain
thattheformalproceduresinplacearebeingadheredtoandthatanysuspiciousfndingswereraised
andinvestigatedaccordingly.Allsuspiciousfndingsandtheresultsofthesubsequentinvestigation
should be promptly reported to the Board.
TheBoardshouldadditionallyobtainandreviewtheAdministrator’sSAS70(orequivalentcontrols
report, if it has one) covering all aspects of the Administrator’s operations, including its AML
procedures, as well as the exit letter from regulator investigations/audits at the Administrator, if
either exists.
Ifnosuchreportexists,considertheneed,giventheriskprofleoftheFund.
The AML policies and procedures adopted by the Administrator or the Investment Manager should
be in compliance with theAML laws and regulations which apply to the Fund in its jurisdiction of
incorporationaswellasinthejurisdictionsoftheAdministratorandtheInvestmentManager.
The Board should ensure any changes in the applicable AML laws and regulations are promptly
addressed and suitable procedures adopted.
The policy adopted should generally also ensure that, until the AML procedures are completed
satisfactorily, any new subscription monies remain in the subscriptions bank account and are not
transferred into the prime brokerage account.
The policy adopted should also ensure that redemptions are paid into the account from which the
originalinvestmentwaswired.Intheeventthattheredeeminginvestorrequeststhatredemption
proceeds be paid into an account different from that from which the investment was paid, the
redeeming investor would normally be asked to substantiate in writing the reason(s) for the new
account.
In the event that a subscription has been accepted without receipt of the full AML documentation,
the Administrator must retain the redemption proceeds until the outstanding documentation has
been provided.
1
2
3
4
5
6
7
8
9
20
AIMA’s OAFD Guide 2008
Role of the Board
Directors are responsible for ensuring that shareholders receive, as a bare minimum, the information that
is promised to them in the Fund’s prospectus; such information typically includes audited annual accounts,
unaudited half-yearly accounts and periodic valuations. The Directors should seek positive assurance from
the Administrator that mailings to shareholders have occurred within statutory deadlines.
Directors should also add themselves to mailing lists maintained by the Investment Manager for periodic
performance or sales updates. A diligent Director will not only absorb the investment update but will also
want to be comfortable that information provided is timely, accurate and relevant.
If the Fund’s shares are admitted to listing on a stock exchange, both the Fund itself and the Fund’s Directors
will be responsible for ensuring that the Fund complies with the continuing obligations imposed by the rules
of that stock exchange.
Breaches of the listing rules can lead to the relevant exchange imposing sanctions on the Fund or the Fund’s
Directors(suchasfnancialpenaltiesorapublicstatementcensuringtheFund,suchasatemporaryoreven
a permanent de-listing of the Fund’s shares).
A brief description of the nature of some typical continuing obligations is set out in AppendixE. Directors of
listed funds should develop an understanding of the nature and detail of the listing rules applicable and be
able to monitor compliance with them.
The Directors should put in place a structure for the regular review of service providers such as the Fund’s
Administrator, prime broker and/or custodian and auditors to ensure their continued competitiveness and
effectiveness. In practice, the Directors will be heavily reliant on the Investment Manager for much of this
process.
Inparticular,theDirectorsshouldsatisfythemselvesthattheFund’sauditorisnotconfictedbyanywork
fortheInvestmentManagerandthatanypotentialconficthasbeensatisfactorilyresolved.Certainauditor
taxservicesmayrequireBoardpre-approvaltoensurethatareviewhasbeenconductedforconficts.Any
potentialforconfictarisingfromtheAdministratorproviding‘middleoffce’functionsfortheInvestment
Managerand‘backoffce’functionsfortheFundshouldalsobedisclosed.
21
AIMA’s OAFD Guide 2008
Role of the Board
It has become increasingly common for investors in Hedge Funds (particularly, institutional investors such
as funds of funds, pension plans and government plans) to seek special terms and conditions to govern their
investments.Suchtermsandconditionsareoftendocumentedin“sideletter”agreementswiththeFund
and/or its Investment Manager. Set out below are some general points which Directors should take into
accountwhenconsideringrequeststoenterintosideletters.
If the Fund enters into side letters, the Directors should ensure that the terms in any letter are explained
to them by the Investment Manager and, if needed, by the Fund’s lawyers, prior to acceptance. The Board
should be made aware of all such arrangements. It needs to be understood by the manager, the adviser and
the Board as to which of them should be (or legally is able to be) the signatory of such letters.
Directors should also ensure that the use of side letters is monitored on a regular basis for actions that are
needed.BoththeInvestmentManagerandDirectorsshould,forexample,review“mostfavourednation”
(MFN) clauses particularly carefully. MFN clauses seek to obtain for an investor the best terms that the Fund
or Investment Manager has granted to any other investor in the Fund. A mistake made in connection with a
side letter could mean that the Investment Manager and/or Directors may be sued by an investor.
Dependingonthequantumandextentofsuchsideletterarrangements,theBoardmayrequestthatmonitoring
for compliance with the terms is implemented and periodic reporting on same is made to the Board.
ThefrstconsiderationwhenasideletterisrequestediswhethertheFund’sprospectusand/orarticlesof
association(orequivalent)permitstheFundtoenterintoasideletterinrespectoftherelevantspecialterms
and conditions. The Fund’s Directors should take legal advice if they are unsure of the position.
TheDirectorsmustalsoconsidertheirfduciarydutiesasDirectors,whichincludeadutytoactbonafdein
what they consider to be the best interests of the Fund. This duty is owed to the Fund itself and the effect
ofthisisthattheDirectorsarenotentitledtoconsidersolelytheinterestsofaspecifcshareholderorthe
Investment Manager in determining whether or not to enter into a side letter. For example, where greater
portfoliotransparencyrightsarerequestedbyaninvestor,theDirectorsshouldconsiderwhetherthiswould
conferamaterialadvantageoverotherinvestorsandwhethertheirdutiesrequirethatthesametransparency
should be provided or offered to all investors. The Fund’s strategy, the nature of the information to be
provided and its timeliness will be relevant factors in making this assessment.
If,forexample,theFundislistedontheIrishStockExchange,notethatthelistingrulesrequiretheFundto
ensureequalityoftreatmentforallshareholderswhoareinthesameposition.Sideletterscan,therefore,
causediffcultiesfortheFundintermsofcomplyingwithitslistingruleobligations.TheDirectorsshouldseek
advice from the Fund’s listing sponsor if in doubt.
22
AIMA’s OAFD Guide 2008
Role of the Board
WhereaFund’sInvestmentManagerisregulatedbytheFSAintheUK,theFSAhasclarifeditsapproach
to the use and disclosure of side letters by the Investment Manager.
In summary, the Investment Manager will be required to disclose the existence of a side letter which
contains “material terms”, and the nature of such terms, where the Investment Manager is party to
thesideletterorisawarethattheFund,ofwhichtheInvestmentManageroranaffliatedentityisthe
Investment Manager, is a party to it.
Forthispurpose,amaterialtermcanbedefnedas:
“Any term the effect of which might reasonably be expected to be to provide an investor with more
favourable treatment than other holders of the same class of share or interest which enhances that
investor’s ability either (i) to redeem shares or interests of that class or (ii) to make a determination
as to whether to redeem shares or interests of that class, and which in either case might, therefore,
reasonably be expected to put other holders of shares or interests of that class who are in the same
positionatamaterialdisadvantageinconnectionwiththeexerciseoftheirredemptionrights.”
AIMA issued an Industry Guidance Note on Side Letters (in September 2006 and a supplement thereto in
October2006–together,“AIMA’sGuidanceNote”)followingdiscussionswiththeFSAonthisrequirement.
AlthoughAIMA’sGuidanceNoteisnot“FSAGuidance”,theFSAhasrevieweditandconfrmedthatitwill
take it into account when exercising its regulatory functions. A copy of AIMA’s Guidance Note is contained
in AppendixF.
This depends on the issue which is covered by the side letter – some issues will require the Fund’s
Directors to sign (e.g., capacity undertakings or more favourable redemption terms) and others may be
signedonlybytheInvestmentManager(e.g.,feerebatesand,subjecttothetermsoftheIMA,additional
portfolio information).
Generallyspeaking,aseparateshareclasswillberequiredunlesseithertheprospectusalreadyprovides
fexibilitytogranttherelevantspecialrightsortherightisonewhichcanproperlybegrantedbythe
InvestmentManager(e.g.,arebateoffeesbytheInvestmentManageror,subjecttothetermsoftheIMA,
the provision of additional portfolio information).
The Fund’s Directors and/or the Investment Manager should ensure that existing investors have received
adequate disclosure that other investors in the same class of shares may be permitted to invest on
differentand/ormorefavourabletermsandconditionsinorderfortheDirectorstofulfltheirDirectors’
dutiesandtheInvestmentManagertofulflitscommonlawfduciaryduties.
23
AIMA’s OAFD Guide 2008
Role of the Board
The Directors both collectively and individually take overall responsibility for all matters relating to the
Fund. A key part of this duty is the approval of the Fund’s prospectus, the subscription documents, the Fund’s
constitutional documents and its material contracts. This approval will usually be given at the inaugural
Board meeting of the Fund.
The authority to commit the Fund to the obligations under the various material contracts as well as the
statements in the prospectus is vested in the Directors.
When a Fund’s shares are being listed on a stock exchange, the prospectus will also constitute listing
particulars and further responsibility and potential liability for the contents of the prospectus is thereby
imposed on the Directors.
The Directors should carry out a periodic review of the Fund’s prospectus and subscription documents (e.g.,
annually) to ensure that they remain up to date. Material contracts should also be reviewed periodically,
although less frequently. The Directors should also review such documents whenever material changes or
revisions are made.
It is normal practice for Funds to reserve the right for the Board of Directors to exercise a discretionary
waiver,onrequestbyaninvestor,overcertaintermsandconditionsrelatingtosubscriptionor
redemption. All such areas of discretion should be clearly set out in the Fund’s prospectus. In case of doubt,
the Directors should seek advice.
Typically, the areas where discretion may be reserved to the Board are:
accepting late subscription or redemption notices/monies after stipulated cut-off times;
accepting subscription amounts or permitting continuing investments that are less than the stated
minimum;
waiver of a minimum lock-up period;
waiver of early redemption penalties; and
waiver of the application of the “gate” (i.e., the power to defer excess redemption requests if
redemptions on any one dealing date exceed a stated maximum threshold).





When exercising a discretionary waiver, the Directors will rely on advice from the Investment Manager that,
in doing so, the interests of existing investors are not being compromised. They may also wish to ensure
thatawaiveronanyparticulardealingdateisappliedequitablyacrossallsubscribingorredeeminginvestors
who are affected. The Directors should take into account whether the Fund’s prospectus requires the
relevant waiver to be applied generally in respect of all investors or whether it can be applied to particular
investors.
Because most waivers are sought at short notice, the Directors may wish to delegate the authority to agree
the waiver to the Investment Manager within certain pre-agreed parameters or to a single Director or a
committee. Where the Investment Manager exercises this authority, the Investment Manager should be
requiredtoreportregularlytotheBoardwhenwaivershavebeengranted.
24
AIMA’s OAFD Guide 2008
Role of the Board
In addition to the legal advisers appointed to the Fund, who will provide advice to the Directors on issues
oflawinrelevantjurisdictions,theBoardmaywishtoreceiveindependentguidancefromtimetotimeon
a specialist topic from a party other than one of the contracted service providers. In such circumstances, a
specialist adviser can be appointed to provide advice to the Board on either a standing basis or a case-by-case
basis. Such specialist topics could include liability insurance, taxation, regulatory developments or valuation
ofilliquidassets.
The Directors must be aware of whether, and in what circumstances, they are permitted to appoint an
expert or an adviser and whether the costs of doing so are chargeable to the Fund; the prospectus will
provideguidanceonwhatispermissiblealthoughtherearerarelyquantitativelimitsonwhatconstitutesa
reasonable level of expenditure. As it is possible that a representative of the Investment Manager may be one
of the Directors and it may not wish the Board to spend money on an independent adviser, it may be sensible
toprovidethatamajorityBoarddecisionmayelecttoappointsuchanexternaladviser.
Fund Boards should decide how executive authority is to be exercised in between Board meetings because it
isunrealistictoexpectallgovernancedecisionstobemadeonlyatthephysicalquarterlyBoardmeetings.
Several options are possible:
a telephone Board meeting (see the recommendation in Section 3.2) can be called for each item as
it arises;
decisions can be made via unanimous circular written resolutions;
decisions can be delegated to an executive management group constituted as a formal sub-committee
of the Board with its own terms of reference; or
decisions can be delegated to one or other service provider (although this is the least preferred
option).




Whereas Directors can delegate decision-making to other bodies, they cannot avoid responsibility for the
decisions or actions thereby arising. The Directors should defne in advance those more routine items of
business that can be delegated to a sub-committee or a service provider. Any decisions made by a delegated
bodyshouldbereportedtotheBoardinwritingatthenextregularmeetingsothattheycanberatifed.
25
AIMA’s OAFD Guide 2008
Directors’ and offcers’ liability insurance
7. DIRECTORS’ANDOFFICERS’LIABILITYINSURANCE
Directors’andOffcers’LiabilityInsurance(D&O)policiestendtocome“offtheshelf”inpre-printedform;
this may convey a set-in-stone legitimacy, discouraging attempts to negotiate more favourable terms.
AD&Opolicyshouldbeviewedasamulti-milliondollarnegotiablecontract,whichshouldbemoreakinto
a negotiated commercial contract than a “take it or leave it, off the shelf” insurance product. Different
D&Opoliciessharethesamestructurebutcanalsovaryastothedetailofspecifcprovisions,sometimes
dramatically.
D&Opoliciesstate,inavarietyofdifferentways,thattheinsurersshallpayonbehalfoftheDirectorsloss
that the Directors incur from claims made against them, which arise from their wrongful acts committed in
their capacity as Directors of the Fund.
DirectorsareofteninadiffcultpositionwithregardtoinsistingonFund-specifcD&Oinsurancebeingputin
place.ItmaybethatthesponsorsaysthatthecoverissuperfuoussincetheFundDirectorwillbecoveredby
a group policy arranged by the sponsor. Insisting on stand- alone cover can be the only way in which a Director
ensures that he has unencumbered assets to defend and settle any litigation against him.
Being part of a group policy exposes the Directors to the possibility that the sponsor of the Fund may do
something to prejudice the Directors’ cover. If the sponsor is based in a different jurisdiction from the
Fund,thenitislikelythatthegrouppolicywillhavebeenplacedinthesponsor’sjurisdiction.Thisraises
thepotentialdiffculty,intheeventofadispute,oftheDirectorcollectingpaymentofhisclaimfromthe
insurerinaforeignjurisdiction.AsimilarproblemmayoccurwithindemnityagreementsgiventoDirectors
by overseas entities.
When considering their options for D&O insurance, the Directors are not only protecting their personal
liability; they are also protecting investors’ assets. In the event of the non-performance of a D&O policy
following a claim, the investors will suffer because the Fund’s assets will need to be used to indemnify the
Directors.
NOTE: This section should not be viewed or considered as detailed commentary, which would
require legal advice.
26
AIMA’s OAFD Guide 2008
Directors’ and offcers’ liability insurance
AD&Opolicyisahighlytechnicallegaldocument,usuallywrittenbyaspecialistteamofinsurancelawyers
employed by the insurance company. If the policy is poorly negotiated on behalf of a Fund’s Directors, then
the outcome of any claim may be extremely detrimental to the Directors and the Fund and beneft the
insurance company instead.
There is no substitute for good advice; Funds should employ an insurance broker who specialises in D&O
insurance and who is also a specialist in the investment sector. It is important that the broker undertakes a
processofduediligenceontheFund,tounderstandfullytheinsuranceriskprofleoftheFund,asthebroker
will be making representations about the risk to insurance companies.
Followingtheduediligenceexercise,abrokershouldbeablefairlyquicklytoprovideanumberofdifferent
proposals for D&O cover and be able to demonstrate clearly the differences between the various D&O
products on offer.
IfDirectorsaskthirdpartyserviceproviders,suchasadministrators,toarrangetheD&Ocoverthenitmakes
sense for them to ensure that the decision on which D&O options should be submitted to the board for
approvalisbasedonqualitativeadvice.
Fund Directors should also consider employing a specialist insurance lawyer to review the D&O products
on their behalf.Thought needs to be given, not just to how the D&O policy will respond to claims in the
jurisdictioninwhichtheFundisdomiciled,butalsoastohowitmayrespondinotherkeyjurisdictions.
FundDirectors(or,normally,oneDirectoronbehalfofallotherDirectors)willberequiredbytheinsurers
to complete a signed and dated proposal form (in the US, known as an application form). This form usually
containsanumberofdetailedquestionsandadeclarationattheendastothetruthofthestatementsmade
in the proposal form.
TheD&OpolicyusuallydeemstheproposalformincorporatedintheD&Opolicyand,therefore,formingthe
basis of the contract agreed between the insurer and the Fund. Great care, therefore, needs to be taken to
ensure that the proposal form is correct. Incorrect statements in the proposal form can negate the contract
- at the very least, as respects the Director who has made the incorrect statements.
Different D&O policies will defne differently what constitutes the proposal made to the insurers by the
Fund - i.e., is the proposal the signed proposal form and, say, the audited accounts or is it all additional
information supplied? Again, care must be taken to ensure that all additional disclosed information is correct
as it may form the basis of the contract.
Defningwhatdoesanddoesnotconstitutetheproposalfortheinsurancecanbekeytoavoidingadispute.
Ideally, the insurer would like to see audited accounts, the latest investor report, the Fund due diligence
documentandaprofleoftheinvestorbase.Providingadetailedriskprofletotheinsurershouldhelpthem
understand the risks better and provide better terms.
27
AIMA’s OAFD Guide 2008
Directors’ and offcers’ liability insurance
The scope of the applicable indemnifcation provisions will differ in various jurisdictions and is normally
outlined in the Fund’s articles of association and/or the Fund’s prospectus. Irrespective of what the Fund
documentationsays,thekeytowhetherDirectorscanbeindemnifedfortheirloss,onacontemporaneous
basis or after the settlement of any litigation, will normally be enshrined in the relevant company law in
which the Fund is domiciled. Under Cayman Islands Law, for example, it seems generally accepted that Funds
will be able to indemnify their Directors in many circumstances.
Subjecttoitslimitofliabilityandanydeductible(alsoknownasapolicyexcessorretention)imposedby
theinsurer,theD&Opolicywill,effectively,actasareplacementforanyindemnitytheDirectorsmaybe
allowed from the Fund.
MostD&Opoliciesprovidebroadlysimilarcoverwithintheirinsuringclauses.Themaininsuringclausesare
normallyintwoparts:thefrstpartcoversthepersonalliabilityoftheDirectorincurredwhilstactingasa
Director of the Fund and the second part covers the Fund, but only where the Fund is able to indemnify the
Director.
In the event of a claim, the insurers will prefer to pay the claim under the second insuring clause and they do
sobystatingthattheywillpresume(normallyexceptinasituationwheretheFundisfnanciallyimpaired)
thattheFundhasindemnifedtheDirectortothefullestextentpermissiblebytheapplicablelaw(called
“presumptiveindemnifcation”byinsurers).
The reason the insurers prefer to have the claim under the second insuring clause is because there is a policy
deductible(i.e.,thefrstpartofanyclaim,forwhichtheFundisliable),whereasthefrstinsuringclause,
the Directors’ personal liability cover, almost always has a nil deductible.
IftheFundisunabletoindemnifytheDirectors,duetoitsfnancialimpairment,manypolicieswillagree
to indemnify the Directors from “the ground up”, i.e., the insurers waive their rights to apply the policy
deductibletothelossoftheDirectors(eventhoughthelosswouldbeindemnifablebytheFund),theinsurers
will normally retain their right to reclaim the amount of the deductible from the Fund.
AstandardD&Opolicycoversnaturalpersonswhoarepast,presentandfutureDirectorsoftheFundand
responds to claims made against them during the period of the policy.
Many Boards, whilst being made up of only non-executives, will be a mix of independent Directors and
individuals connected to the Investment Manager and the Fund’s other service providers.
TheD&Opolicyhasasingleaggregatelimitofliability,whichhastobesharedbyalloftheDirectors,forall
claims which are made during the period of the policy (normally 12 months).
In the event of litigation against the Fund’s Board, it may be that the different non-executive Directors of
theFundhaveverydifferentviewsonthedefenceandsettlementoftheclaimandtheremaybeconficting
positions, so that each Director may want to instruct his own legal team to conduct his personal defence.
HavingmanylawfrmsandCounselworkingonthesameclaim,fordifferentDirectors,couldquicklyerode
the aggregate limit of liability.
28
AIMA’s OAFD Guide 2008
Directors’ and offcers’ liability insurance
ItmaybethattheDirectorsareinsuredwithinasinglejoint-policy,whichpotentiallycovers:
theDirectorsandOffcersoftheFund;
the Investment Manager of the Fund and its employees (Professional Indemnity Insurance);
the Fund’s corporate liability (and potentially, indemnities provided by the Fund to the service
providers under the material contracts); and
the General Partner of a Limited Partnership.




Having all of the above parties insured within a single annual aggregate limit of liability can be a cost
effective solution but it can create tensions, particularly if the Directors or the Fund needs to claim against
the Investment Manager.
The Directors need to consider whether there will be enough cover to meet their personal liabilities (and
indirectly, therefore, to protect the Fund’s assets from having to indemnify them) in the event that there is
aclaimunderajointpolicythatismadeagainsttheDirectorsandotherpartieswhoarealsocovered.
Theindemnityispaidoutonafrstcome,frstservedbasis,sothatifthecoverisinadequate,somebodywill
be left without any insurance protection.
In determining an appropriate level of cover, Fund Directors should seek advice about the potential legal
costs of defending complicated and protracted litigation and/or investigations brought by investors and/or
regulators.AstheD&Opolicywillalsopaydamages,considerationneedstobegiventopotentialdamages
andanypunitiveawardsinsettingthelimitofD&Ocover.
The annual aggregate limit of liability of the policy needs to pay for all legal fees and damages (including
potentially punitive damages in certain territories) incurred by the Directors in connection with all claims
made.
Withallpartiesinsuredbyasinglelimit,thelimitwillneedtobeadequatetofundthedefencecostsfora
complicateddefence,whereeachpartymightrequireitsowndefenceteam.Itispossiblethattheremay
alsobelitigationinmorethanonejurisdictioninrespectofthe“same”claim.
Thequestionofdamagesandwhatmightbeasuffcientlimittopaythecompensatoryorpunitivedamages
partoftheclaimismuchmorediffcultandneedstorefecttheoverallsizeoftheFundandwhatmagnitude
of event or drawdown might be a trigger for investor litigation.
Many policies are denominated in Dollars. If the Directors are likely to incur costs in a currency other than
Dollars (e.g., the potential cost of using UK Counsel in Cayman litigation), then the prevailing exchange rates
needtobeconsideredinsettinganadequatelimit.
Directorsshouldundertakeacost/beneftanalysiswhensettingtheleveloftheirD&Ocoverandwillneedto
bearinmindthatinadequatelimitsofcover,orapoorlyconstructedD&Opolicy,maymeanthattheDirectors
willhavetocallonaFund’sassetsforindemnifcationwheretheD&Opolicyfailstorespond.
29
AIMA’s OAFD Guide 2008
Directors’ and offcers’ liability insurance
Fund assets (US$) Limit of D&O cover (US$)
0-0.5bn 5m
0.5 bn to 1bn 5m to 10m
1bn to 2.5bn 10m to 15m
2.5bn to 5bn 15m to 30m
>5bn >30m
ThepriceoftheD&Oinsuranceisimportantbutthebreadthofthecoverisvitalanditisthequalityofthe
cover which determines its value.
Whilst considering their options, Directors need to think about what their and the Fund’s key exposures are
andwhethertheD&Opolicycorrectlyaddressesthese.Theseexposureswouldincludeinvestorlitigation,
regulatory claims and investigation, asset valuation problems, misrepresentations in the prospectus,
extradition to the USA and service provider claims and indemnities.
MostD&Opoliciesprovidebroadlysimilarcoverwithintheirinsuringclauses.However,themostimportant
differencesincoverarenormallycontainedinthepolicydefnitionsandexclusions,particularlytheadditional
exclusions endorsed onto the policy by the insurers.
D&OpoliciesrespondtothelegalliabilityoftheDirectorsfor“loss”resultingfroma“claim”foraDirector’s
“wrongful act”. The words in quotations are normally defned terms and all these defnitions need to be
triggered for the policy to respond in the frst instance (even before any exclusions are applied by the
insurer).
“claim”shouldbebroadlydefnedsothatthepolicywillrespondtoalllikelyroutesoflitigation,including
anyinitialwrittendemand,evenifthedemanddoesnotquantifythe claiminmonetaryterms.
“loss”defneswhattheinsurerswillpay(generally,defencecostsanddamages/settlements)andwhatthe
insurerswillnotpay(generally,fnesandtaxes).Careneedstobetakentocheckwhethertheinsurershave
included or excluded punitive damages cover, as the claim may be heard and an award made in a US court.
“wrongful act”isfairlyuniversallybroadlydefnedasanyactoromissioncommittedbytheDirectorwhilst
acting in his capacity as a Director of the Fund.
It is particularly important to review how the policy will operate for litigation in the US. How does the policy
defnethejurisdictionsinwhichitresponds?IsitfullworldwidecoverordoesitexcludetheUSorsomeUS
statutes?
As a rule of thumb, and not based on the actual relative exposures of a Fund’s Directors to defence costs and
damagesawards,thefollowinglimitsofD&Ocoverareindicative,basedontheassetsoftheFund:
30
AIMA’s OAFD Guide 2008
Directors’ and offcers’ liability insurance
Itisimportanttolookatexclusionsnotjustintermsoftheparticularthingthatisexcludedbythem,but
also as to what the preamble to the exclusion says. The preamble largely dictates how broadly the exclusions
can be applied by the insurers.
D & O policy exclusion preambles
The preambles below, numbered (1) to (3), are representative of the different types used in exclusions. They
range from:
“For”…XYZ
Thistypeofexclusionisknownasa“forlanguageexclusion”andtheintentisthatitonlyexcludes
thedirectlossfromXYZthatisspecifcallyexcludedbytheexclusion.Theinsurers’statedintentis
that indirect loss is not necessarily excluded by this exclusion.
“Arisingoutof,baseduponorattributableto”…XYZ.
This type of exclusion seeks to exclude direct or indirect loss where the originating cause of the loss
isXYZ.
“Arising out of, based upon or attributable to, or in any way involving, directly or indirectly” …
XYZ.
This type of exclusion is known as an “absolute exclusion”. The preamble to the exclusion is so
broadlywrittenthatiflitigationmentionsXYZ,evenifitisnotthemainfocusoftheclaim,thenthe
insurers will have the right to deny cover.
1
2
3
ThereareanumberofadditionalexclusionswhichareoftenappliedtostandardD&Opoliciesbyinsurersand
theFund’sDirectorsneedtolookatthespecifcwordingoftheexclusion,inconjunctionwiththeexclusion’s
preamble, to see how broadly each exclusion can be applied.
Itisimportanttolookatwhattheexclusionsactuallysay,ratherthanjustrelyonanystatedintent,andto
considerwhattheimpactmightbewhenconsideringthelikelytriggersoflitigationunderaD&Opolicy.
Many policies exclude claims under the following exclusions:
Thedepreciationorlossofinvestmentswhensuchdepreciationorlossisaresultofanyfuctuationin
anyfnancial,stock,commodityorothermarketwhensuchfuctuationisoutsidetheinfuenceorcontrol
of a Director.
Any stock or commodity or investment failing to perform as represented or as expected to perform.
In respect of any claim arising out of, based upon, attributable to or in any way involving any actual or
alleged act of money laundering.
31
AIMA’s OAFD Guide 2008
Directors’ and offcers’ liability insurance
Where any shareholder owns more than 15% of the Fund.
Claims made under the US Employee Retirement Income Security Act of 1974 .
Claims made under the US Securities Act of 1933 or the Securities Exchange Act of 1934.
Claims made in the US or the enforcement of US court decisions in other territories.
Can exclude claims from a Fund’s insolvency. Fund Directors should be particularly wary of this exclusion
since in the event of insolvency there will be no indemnity from the Fund and the Directors will be relying
on the insurance to fund their defence costs.
The potential impact of some, or all, of these exclusions needs to be considered in line with the protections
that the Directors are seeking for themselves and for the Fund’s assets.
APPENDICES
Does the Board have any real discretion or is it only allowed to take decisions within narrow parameters
set down by (for example) the promoters of the Fund? If its discretion is too tightly restricted, it may
not be exercising central management and control.
Is the Board truly taking decisions when it meets? It may be merely rubber-stamping the decisions of
those to whom it has delegated powers or, alternatively, its members may take decisions in the UK
beforefyingoffshoreforameetingwhoseonlypurposeispresentational.
1
2
ThequestionofrestrictionswhichmaybeimposedontheBoardofaFundisadiffcultoneinthecontext
ofdeterminingUKtaxability.Itisobviouslyappropriatethatobjectivesorotherguidelines(forexample,
restrictions on borrowing or leverage) should exist. These will be incorporated into the prospectus or the
document under which the Fund’s shares are offered to investors. These determine the parameters of the
business to be carried out and for which the Fund is established and which it is the Directors’ responsibility
to manage.
The limits on the Board’s discretion imposed by the terms of the prospectus should not compromise the
independence of the Board. The non-UK taxable status of the Fund may, however, be called into doubt if the
Board is simply authorising actions already determined by the Fund’s promoters in the UK.
33
AIMA’s OAFD Guide 2008
Appendices
APPENDIXA-Guidanceontaxissues:UK,IrelandandtheUS
The basic rule in the UK is that an offshore company will be considered taxable in the UK if central management
and control of the company is exercised in the UK.
Central management and control should be distinguished from the day-to-day running of the Fund. Central
management and control is the strategic decision making process and would generally include matters such as
the setting and regular review of the investment policies and strategies of the Fund and determining whether
the Fund should appoint a new Investment Manager. This contrasts with the day-to-day running of the Fund,
which would include decisions such as whether or not to buy or sell a particular investment (which will usually
be delegated to the Investment Manager).
Central management and control is normally exercised by the Board of Directors of the Fund but it could
in appropriate circumstances be exercised by any other person (e.g., the Fund’s Investment Manager). UK
taxsusceptibilityisaquestionoffactanditisnecessarytoshowineachcasethatcentralmanagementand
control of the Fund is genuinely exercised outside the UK.
Guidance (for illustrative purposes only) on when an offshore company would become taxable in
the UK, Ireland or the US (see Section 1.1 above)
In identifying where the central management and control of a Fund is exercised, the starting point is its Board
of Directors. Normally, the Fund’s constitution will give the Board the relevant powers and, in considering
where the Fund is taxable, the location of its Board meetings is the best place to begin.
However,itisnotautomaticthattaxationwillariseinthejurisdictioninwhichBoardmeetingsarenormally
held; most obviously, the Board may not, in practice, be exercising central management and control. Two
questionsinparticularwillberelevant:
The constitution of the Fund may permit the Board to authorise individual Directors or set up a committee
to take decisions on its behalf. This should be avoided unless the Director is resident, and carries out his
duties,outsidetheUKorthecommitteemeetsoutsidetheUKandisnotcomprisedofamajorityofnon-UK
resident Directors.
The appointment of an Investment Manager or Administrator of the Fund does not contravene this principle
providedthatthedutiesdelegateddonotamountto“centralmanagementandcontrol”.TheBoardmust
retain the overall responsibility for the setting and regular review of the Fund’s investment policies and
strategies and determining whether the Fund should appoint new Investment Managers.
The UK tax authorities may be sceptical that Board meetings are anything more than a rubber-stamping
processifamajorityofaBoardofDirectorsareUKresidentandarenotthemselvesresidentinthejurisdiction
where Board meetings regularly take place.
If,forexample,amajorityoftheDirectorsoftheFundliveandworkintheUKbutfyouttoanoffshore
locationeverythreemonthsformeetings,itwillbediffculttoconvincetheUKtaxauthorities,shouldthey
review the position, that the Directors are not communicating with each other in discussing the business of
theFundwhenintheUK,sothattheBoardmeetingsarepurelypresentational.Itisnotsuffcientforthe
Boardmerelytomeetinanoffshorejurisdiction;itmustactuallyexercisecentralmanagementandcontrol
– in other words, the real strategic decisions must be taken offshore.
The UK tax authorities may also be sceptical that Board meetings are the real decision making forum if the
Board lacks members with expertise and experience so it cannot reach reasoned and well informed decisions
on matters relating to the Fund’s investment policies and strategies.
34
AIMA’s OAFD Guide 2008
Appendices
The circumstances in which an offshore company will be considered taxable in Ireland are substantially
similar to those in which an offshore company can become taxable in the UK. As a result, many of the
recommendedpracticestopreventsuchcircumstancesarisingapplyequallyinrespectofIrelandandIrish
resident Directors of such a Fund as they do to the UK and UK resident Directors.
AnoffshorecompanywillnotbesubjecttoUSfederalincometaxesonincomeorgainsfromtradingstock,
securities or commodities (except in respect of any dividends received in the course of such trading, as
discussed below), provided that it does not engage in a trade or business within the US to which such income
or gains are effectively connected. Pursuant to safe harbour provisions under the US Internal Revenue Code
of1986,asamended(the“Code”),anon-UScorporationwillnotbeconsideredtobeengagedinaUStradeor
business so long as the corporation is trading stock, securities or commodities for its own account, provided
that the non-US corporation is not a dealer in stock, securities or commodities.
However, if the activities of a non-US corporation were not able to utilise the safe harbour provisions,
thereisariskthatsuchcorporationwouldberequiredtofleaUSfederalincometaxreturnfortheyearin
which such activities took place and pay tax at full US corporate income tax rates as well as an additional
thirtypercent(30%)branchproftstax.Activitiesinwhichaninvestmentmanagerrisksthepossibilityof
US taxation include real estate investments and investments in partnerships, limited liability companies or
Subchapter S corporations which operate businesses in the US.
An offshore company would be subject to US withholding tax at a rate of thirty percent (30%) on its US
sourced dividends, unless a reduced rate is applicable under a US tax treaty with the company’s country of
domicile.
Non-UScorporationsarenotsubjecttoUSfederalincomeorwithholdingtaxonUSsourceinterestincome
(other than in the case of certain contingent interest or interest received from a borrower ten percent
(10%)ormoreoftheequityofwhichisownedbythecorporation),providedthatcertainrestrictionsapply.
The corporation must not be engaged in a trade or business within the US to which such interest income is
effectivelyconnected.Inaddition,thecorporation’sinterest-bearingsecuritiesmustqualifyasregistered
obligations.Further,thecorporationmustsupplyanIRSFormW-8BENoritsequivalenttothesecurityissuer
whenrequiredtodosobytheIRS.
Under current US law, a majority of the Directors of an offshore Fund can be US residents, unless the
Investment Manager chooses to defer any portion of its management fees or incentive fees, a practice
adoptedbymanyUSInvestment Managers. IfaUSInvestmentManager defersitsfees,amajorityofthe
Directors of the Fund should be non-US residents, since the control of the Fund should be outside the US.
35
AIMA’s OAFD Guide 2008
Appendices
36
AIMA’s OAFD Guide 2008
Appendices
APPENDIXB-SupervisoryCommittee:Swissrequirement
(see Section 1.2)
Where a Hedge Fund or Fund of Hedge Funds authorised in an EU Member State, the U.S., Guernsey or Jersey
(the“HomeJurisdiction”)wantstoapplyforauthorisationforpublicofferinginorfromSwitzerland,the
SwissauthoritieswillrequirethataSupervisoryCommitteebeestablishedlocallyintheHomeJurisdiction
(i.e., the members of the Supervisory Committee must be resident in the Home Jurisdiction) and that the
following terms are imposed on it:
the Directors have delegated to the Supervisory Committee the responsibility for supervising (i)
compliance with the Fund’s Investment Restrictions, (ii) the day-to-day asset allocation of the Fund
and (iii) the Investment Manager’s activities. The Supervisory Committee must also have the duty
to ensure that, at all times, the Investment Manager and the other services providers to which any
functions have been delegated by the Fund are in compliance with the terms of the delegation
agreement, the applicable law and regulations in the Fund’s Home Jurisdiction, the Articles of
Association and the Prospectus; and
the Supervisory Committee must ensure compliance by the Fund with the Investment Restrictions
andoverseetheimplementationofitsinvestmentobjectivesandpoliciesandreviewperiodicallyall
day-to-day investment decisions taken by the Investment Manager.


Meetings of Directors appointed to such a Supervisory Committee will probably have to take place on
aregularbasis(i.e.,onamonthlyorquarterlybasis),dependingontheinvestmentpolicyoftheFund
and the periodicity of investment decisions.
The members of the Supervisory Committee must have online access to the Fund’s portfolio, in order
to be in a position to oversee the investment policy and review on a day-to-day basis the investment
decisions.
Where a Director serves on a Supervisory Committee, an additional fee may be appropriate (see
Section 2.2 above).
1
2
3
37
AIMA’s OAFD Guide 2008
Appendices
APPENDIXC-HedgeFundBoardresponsibilities
(see Section 4.1)
B
o
a
r
d

R
o
l
e
T
o
p
i
c
P
o
l
i
c
y
?
B
o
a
r
d

s

C
o
n
t
r
o
l

M
e
c
h
a
n
i
s
m
?
D
e
l
e
g
a
t
e
d

P
a
r
t
y
R
e
p
o
r
t
i
n
g

t
o

B
o
a
r
d
M
o
n
i
t
o
r
i
n
g

a
d
h
e
r
e
n
c
e

t
o

i
n
v
e
s
t
m
e
n
t

p
o
l
i
c
y

a
n
d

r
e
s
t
r
i
c
t
i
o
n
s
M
o
n
i
t
o
r
i
n
g

o
f

F
u
n
d

v
e
r
s
u
s

i
n
v
e
s
t
m
e
n
t

o
b
j
e
c
t
i
v
e
s
Y
e
s
/
N
o
?
B
o
a
r
d

o
v
e
r
s
i
g
h
t
H
F
M
Q
u
a
r
t
e
r
l
y

r
e
p
o
r
t

t
o

B
o
a
r
d
M
o
n
i
t
o
r
i
n
g

a
d
h
e
r
e
n
c
e

t
o


i
n
v
e
s
t
m
e
n
t

p
o
l
i
c
y

a
n
d

r
e
s
t
r
i
c
t
i
o
n
s
M
o
n
i
t
o
r
i
n
g

o
f

F
u
n
d

v
e
r
s
u
s

i
n
v
e
s
t
m
e
n
t

r
i
s
k

p
a
r
a
m
e
t
e
r
s
Y
e
s
/
N
o
?
B
o
a
r
d

o
v
e
r
s
i
g
h
t
H
F
M
Q
u
a
r
t
e
r
l
y

r
e
p
o
r
t

t
o

B
o
a
r
d
M
o
n
i
t
o
r
i
n
g

N
A
V

c
a
l
c
u
l
a
t
i
o
n
P
r
i
c
i
n
g

p
o
l
i
c
y

f
o
r

a
l
l

F
u
n
d

a
s
s
e
t
s
Y
e
s
/
N
o
?
P
r
i
c
i
n
g

p
o
l
i
c
y
A
d
m
i
n
i
s
t
r
a
t
o
r

a
n
d

H
F
M
R
e
v
i
e
w

o
f

w
r
i
t
t
e
n

p
o
l
i
c
y
M
o
n
i
t
o
r
i
n
g

N
A
V

c
a
l
c
u
l
a
t
i
o
n
M
o
n
i
t
o
r
i
n
g

N
A
V

c
a
l
c
u
l
a
t
i
o
n
Y
e
s
/
N
o
?
A
p
p
r
o
v
a
l

o
f

a
n
y

e
x
c
e
p
t
i
o
n
s
A
d
m
i
n
i
s
t
r
a
t
o
r

a
n
d

H
F
M
B
y

e
x
c
e
p
t
i
o
n

o
n
l
y
M
o
n
i
t
o
r
i
n
g

N
A
V

c
a
l
c
u
l
a
t
i
o
n
S
u
s
p
e
n
d

N
A
V
Y
e
s
/
N
o
?
B
o
a
r
d

r
e
s
o
l
u
t
i
o
n

r
e
q
u
i
r
e
d
A
d
m
i
n
i
s
t
r
a
t
o
r

a
n
d

H
F
M
Q
u
a
r
t
e
r
l
y

r
e
p
o
r
t

t
o

B
o
a
r
d
M
o
n
i
t
o
r
i
n
g

N
A
V

c
a
l
c
u
l
a
t
i
o
n
C
r
e
a
t
i
o
n

o
f

r
e
s
e
r
v
e
s
Y
e
s
/
N
o
?
5
%

l
i
m
i
t

o
n

c
r
e
a
t
i
o
n

o
f

r
e
s
e
r
v
e
s
A
d
m
i
n
i
s
t
r
a
t
o
r

a
n
d

H
F
M
Q
u
a
r
t
e
r
l
y

r
e
p
o
r
t

t
o

B
o
a
r
d
M
o
n
i
t
o
r
i
n
g

m
a
r
k
e
t
i
n
g

a
n
d

i
n
v
e
s
t
o
r

r
e
l
a
t
i
o
n
s
A
s
s
e
s
s

s
h
a
r
e
h
o
l
d
e
r

s
u
i
t
a
b
i
l
i
t
y
Y
e
s
/
N
o
?
D
e
f
n
i
t
i
o
n
s

o
f

e
l
i
g
i
b
l
e

i
n
v
e
s
t
o
r
s
A
d
m
i
n
i
s
t
r
a
t
o
r

a
n
d

H
F
M
Q
u
a
r
t
e
r
l
y

r
e
p
o
r
t

t
o

B
o
a
r
d
M
o
n
i
t
o
r
i
n
g

m
a
r
k
e
t
i
n
g

a
n
d

i
n
v
e
s
t
o
r

r
e
l
a
t
i
o
n
s
A
p
p
l
i
c
a
t
i
o
n

o
f

t
h
e

r
e
d
e
m
p
t
i
o
n

g
a
t
e
Y
e
s
/
N
o
?
L
i
m
i
t
s

o
f

X
X
$

o
r

$
X
X
m
n
A
d
m
i
n
i
s
t
r
a
t
o
r

a
n
d

H
F
M
Q
u
a
r
t
e
r
l
y

r
e
p
o
r
t

t
o

B
o
a
r
d
M
o
n
i
t
o
r
i
n
g

m
a
r
k
e
t
i
n
g

a
n
d

i
n
v
e
s
t
o
r

r
e
l
a
t
i
o
n
s
C
o
m
p
u
l
s
o
r
y

r
e
d
e
m
p
t
i
o
n
Y
e
s
/
N
o
?
D
e
f
n
i
t
i
o
n
s

o
f

e
l
i
g
i
b
l
e

i
n
v
e
s
t
o
r
s
A
d
m
i
n
i
s
t
r
a
t
o
r

a
n
d

H
F
M
Q
u
a
r
t
e
r
l
y

r
e
p
o
r
t

t
o

B
o
a
r
d
M
o
n
i
t
o
r
i
n
g

m
a
r
k
e
t
i
n
g

a
n
d

i
n
v
e
s
t
o
r

r
e
l
a
t
i
o
n
s
S
u
s
p
e
n
d

r
e
d
e
m
p
t
i
o
n
s
Y
e
s
/
N
o
?
P
e
r
m
i
s
s
i
b
l
e

c
i
r
c
u
m
s
t
a
n
c
e
s

l
i
s
t
e
d
A
d
m
i
n
i
s
t
r
a
t
o
r

a
n
d

H
F
M
N
o
n
e

c
u
r
r
e
n
t
l
y
M
o
n
i
t
o
r
i
n
g

m
a
r
k
e
t
i
n
g

a
n
d

i
n
v
e
s
t
o
r

r
e
l
a
t
i
o
n
s
S
u
s
p
e
n
d

p
a
y
m
e
n
t

o
f

r
e
d
e
m
p
t
i
o
n

p
r
o
c
e
e
d
s
Y
e
s
/
N
o
?
A
M
L

r
e
s
t
r
i
c
t
i
o
n
s
A
d
m
i
n
i
s
t
r
a
t
o
r

a
n
d

H
F
M
Q
u
a
r
t
e
r
l
y

r
e
p
o
r
t

t
o

B
o
a
r
d
M
o
n
i
t
o
r
i
n
g

m
a
r
k
e
t
i
n
g

a
n
d

i
n
v
e
s
t
o
r

r
e
l
a
t
i
o
n
s
S
h
a
r
e

t
r
a
n
s
f
e
r
s
Y
e
s
/
N
o
?
D
e
f
n
i
t
i
o
n
s

o
f

e
l
i
g
i
b
l
e

i
n
v
e
s
t
o
r
s
A
d
m
i
n
i
s
t
r
a
t
o
r

a
n
d

H
F
M
Q
u
a
r
t
e
r
l
y

r
e
p
o
r
t

t
o

B
o
a
r
d
M
o
n
i
t
o
r
i
n
g

m
a
r
k
e
t
i
n
g

a
n
d

i
n
v
e
s
t
o
r

r
e
l
a
t
i
o
n
s
R
e
f
u
s
a
l

o
f

a

s
u
b
s
c
r
i
p
t
i
o
n
Y
e
s
/
N
o
?
D
e
f
n
i
t
i
o
n
s

o
f

e
l
i
g
i
b
l
e

i
n
v
e
s
t
o
r
s
A
d
m
i
n
i
s
t
r
a
t
o
r

a
n
d

H
F
M
Q
u
a
r
t
e
r
l
y

r
e
p
o
r
t

t
o

B
o
a
r
d
A
n
t
i
-
m
o
n
e
y

l
a
u
n
d
e
r
i
n
g

r
e
s
p
o
n
s
i
b
i
l
i
t
i
e
s
O
v
e
r
s
i
g
h
t

o
f

A
M
L

a
r
r
a
n
g
e
m
e
n
t
s
Y
e
s
/
N
o
?
A
M
L

p
o
l
i
c
i
e
s

o
f

A
d
m
i
n
i
s
t
r
a
t
o
r

a
n
d

H
F
M
A
d
m
i
n
i
s
t
r
a
t
o
r

a
n
d

H
F
M
Q
u
a
r
t
e
r
l
y

r
e
p
o
r
t

t
o

B
o
a
r
d
R
e
v
i
e
w

o
f

a
p
p
o
i
n
t
m
e
n
t

a
n
d

p
e
r
f
o
r
m
a
n
c
e

o
f

s
e
r
v
i
c
e

p
r
o
v
i
d
e
r
s
M
o
n
i
t
o
r

p
e
r
f
o
r
m
a
n
c
e

o
f

e
a
c
h

s
e
r
v
i
c
e

p
r
o
v
i
d
e
r
Y
e
s
/
N
o
?
K
e
y

P
e
r
f
o
r
m
a
n
c
e

I
n
d
i
c
a
t
o
r
s
H
F
M
Q
u
a
r
t
e
r
l
y

r
e
p
o
r
t

t
o

B
o
a
r
d
R
e
v
i
e
w

o
f

a
p
p
o
i
n
t
m
e
n
t

a
n
d

p
e
r
f
o
r
m
a
n
c
e

o
f

s
e
r
v
i
c
e

p
r
o
v
i
d
e
r
s
A
p
p
o
i
n
t
m
e
n
t

o
f

a
u
d
i
t
o
r
s
Y
e
s
/
N
o
?
L
e
t
t
e
r

o
f

E
n
g
a
g
e
m
e
n
t
H
F
M
A
n
n
u
a
l

a
u
d
i
t

r
e
v
i
e
w
C
o
m
p
l
i
a
n
c
e

w
i
t
h

l
i
s
t
i
n
g

r
u
l
e
s


a
n
d

c
o
n
t
i
n
u
i
n
g

o
b
l
i
g
a
t
i
o
n
s
A
p
p
r
o
v
a
l

o
f

t
h
e

F
u
n
d

s

a
c
c
o
u
n
t
s

a
n
d

t
h
e

a
u
d
i
t

p
r
o
c
e
s
s
Y
e
s
/
N
o
?
A
n
n
u
a
l

a
u
d
i
t

r
e
v
i
e
w
A
u
d
i
t

s
u
b
-
c
o
m
m
i
t
t
e
e
A
n
n
u
a
l

a
u
d
i
t

r
e
v
i
e
w
S
i
d
e

l
e
t
t
e
r
s
S
i
d
e

l
e
t
t
e
r
s
Y
e
s
/
N
o
?
L
o
g

o
f

s
i
d
e

l
e
t
t
e
r
s
H
F
M
Q
u
a
r
t
e
r
l
y

r
e
v
i
e
w

o
f

l
o
g
A
p
p
r
o
v
a
l

o
f

p
r
o
s
p
e
c
t
u
s

a
n
d

c
o
n
s
t
i
t
u
t
i
o
n
a
l

d
o
c
u
m
e
n
t
s
M
a
i
n
t
e
n
a
n
c
e

o
f

F
u
n
d

d
o
c
u
m
e
n
t
a
t
i
o
n
Y
e
s
/
N
o
?
C
h
a
n
g
e
s

a
d
o
p
t
e
d

b
y

r
e
s
o
l
u
t
i
o
n
H
F
M
A
s

r
e
q
u
i
r
e
d
E
x
e
r
c
i
s
i
n
g

d
i
s
c
r
e
t
i
o
n
a
r
y

w
a
i
v
e
r
s
W
a
i
v
e
r
s

f
o
r

m
i
n
i
m
u
m

s
u
b
s
c
r
i
p
t
i
o
n
s
Y
e
s
/
N
o
?
M
a
n
a
g
e
m
e
n
t

s
u
b
-
c
o
m
m
i
t
t
e
e
M
a
n
a
g
e
m
e
n
t

s
u
b
-
c
o
m
m
i
t
t
e
e
Q
u
a
r
t
e
r
l
y

r
e
p
o
r
t

t
o

B
o
a
r
d
E
x
e
r
c
i
s
i
n
g

d
i
s
c
r
e
t
i
o
n
a
r
y

w
a
i
v
e
r
s
W
a
i
v
e
r
s

f
o
r

l
a
t
e

n
o
t
i
c
e

r
e
d
e
m
p
t
i
o
n
s
Y
e
s
/
N
o
?
M
a
n
a
g
e
m
e
n
t

s
u
b
-
c
o
m
m
i
t
t
e
e
M
a
n
a
g
e
m
e
n
t

s
u
b
-
c
o
m
m
i
t
t
e
e
Q
u
a
r
t
e
r
l
y

r
e
p
o
r
t

t
o

B
o
a
r
d
E
x
e
r
c
i
s
i
n
g

d
i
s
c
r
e
t
i
o
n
a
r
y

w
a
i
v
e
r
s
W
a
i
v
e
r
s

o
f

r
e
d
e
m
p
t
i
o
n

p
e
n
a
l
t
i
e
s
Y
e
s
/
N
o
?
M
a
n
a
g
e
m
e
n
t

s
u
b
-
c
o
m
m
i
t
t
e
e
M
a
n
a
g
e
m
e
n
t

s
u
b
-
c
o
m
m
i
t
t
e
e
Q
u
a
r
t
e
r
l
y

r
e
p
o
r
t

t
o

B
o
a
r
d
G
o
v
e
r
n
a
n
c
e
M
a
n
a
g
e
m
e
n
t

o
f

s
u
b
-
c
o
m
m
i
t
t
e
e
s
Y
e
s
/
N
o
?
B
o
a
r
d

o
v
e
r
s
i
g
h
t
N
/
A
A
n
n
u
a
l

r
e
v
i
e
w

o
f

T
o
R
G
o
v
e
r
n
a
n
c
e
C
o
n
v
e
n
e

s
h
a
r
e
h
o
l
d
e
r

m
e
e
t
i
n
g
s
Y
e
s
/
N
o
?
C
a
l
e
n
d
a
r

o
f

f
o
r
w
a
r
d

e
v
e
n
t
s
H
F
M
Q
u
a
r
t
e
r
l
y

r
e
p
o
r
t

t
o

B
o
a
r
d
O
t
h
e
r
D
i
r
e
c
t
o
r
s


a
n
d

S
t
a
f
f

D
e
a
l
i
n
g
Y
e
s
/
N
o
?
D
e
a
l
i
n
g

p
o
l
i
c
y
N
o
m
i
n
a
t
e
d

F
u
n
d

D
i
r
e
c
t
o
r
s
A
s

r
e
q
u
i
r
e
d
O
t
h
e
r
D
i
s
c
l
o
s
u
r
e

o
f
/
p
r
e
v
e
n
t
i
o
n

o
f

c
o
n
f
i
c
t
s

o
f

i
n
t
e
r
e
s
t
Y
e
s
/
N
o
?
D
i
r
e
c
t
o
r
s


d
e
c
l
a
r
a
t
i
o
n
s
N
/
A
A
s

r
e
q
u
i
r
e
d
O
t
h
e
r
D
e
c
l
a
r
e

d
i
v
i
d
e
n
d
s
Y
e
s
/
N
o
?
D
i
v
i
d
e
n
d
s

d
e
c
l
a
r
e
d

b
y

r
e
s
o
l
u
t
i
o
n
H
F
M
Q
u
a
r
t
e
r
l
y

r
e
p
o
r
t

t
o

B
o
a
r
d
38
AIMA’s OAFD Guide 2008
Appendices
APPENDIXD-Matterstotakeintoaccountinrespectofannual
auditandaccounts
Matters which a Board may wish to take into account concerning the annual audit and accounts
production process (see Section 5.1)
Agree audit and related (e.g., PFIC or K1) fees in writing early on in the year to be audited and
provide a fee estimate to the Administrator for expense accruals. If these are provided early in the
year, they are likely to be estimates because, if a Fund doubles in size or changes its structure, there
will obviously be a need to reassess the fees.
Agree in advance of the year end the timetable and process responsibilities (especially the roles of
the auditor, Investment Manager and Administrator). As auditors may run very close to deadlines, it
may be advisable to agree a deadline some time ahead of the regulatory deadline, to ensure that the
Directorshavesuffcienttimetoreviewtheauditandaccounts.
ConfrmwiththeauditorsiftheywillbeaskedtomakeaformalpresentationtotheBoardonthe
audit planning, approach and results of the audit work performed.
Ensure any new auditing, accounting or regulatory provisions have been considered and factored into
theauditapproach(e.g.,newUSGAAPrequirementunderFIN48forassessmentofalltaxpositions
taken).
Confrmandobserveanyapplicabledeadlinestobemet–e.g.,pursuanttotheprospectusandunder
the Irish Stock Exchange listing rules (if applicable).
Agree the format of the accounts, particularly where there are any new audit standards or a new
auditfrmoroffceisinvolved.
ConsideranyapplicableIrishStockExchangecontentrequirements(andresponsibilityforchecking
compliance) and inclusion of the Directors or Investment Managers’ report (these may not automatically
be covered by the auditors).
Ensure that the fnal audited accounts are sent to all local regulators and/or stock exchanges, as
requiredandallotherregulations(e.g.,consentletters,etc.)arecompliedwith.
Remember Commodity Pool Operator statement and deadlines if the Investment Manager is CFTC
registered.
ForaCaymanincorporatedFund,ensurethattheCaymanoffceoftheauditorsisinvolvedearlyso
theydonotmakesignifcantchangeslater.
Establish the auditors’ letter of engagement (L/E), including any updates. Be aware of the different
limitationsofliabilitybetweendifferentoffcesoftheFund’sauditorsandbetweendifferentaudit
frms.
Establish the form and content of any Directors’ letter of representation (L/R) required by the
auditors at an early stage (particularly, check the responsibilities which the auditors think the
Directors have).
Seek from the Administrator an appropriate letter of comfort in relation to the Directors’ L/R since
they have done most of the work and have the most knowledge on the state of the records.
Remembertoreadcriticallythenotestotheaccounts(theyfrequentlycontainmorethanaccounting
principles and may be factually inaccurate if not reviewed by those governing the Fund and overseeing
changes on an ongoing basis).
Identify the availability of the Fund Directors so they have time to consider and approve the accounts,
the auditors’ L/E and the L/R.
Establishprintquantitiesand/oremailformatforaccountstobecirculatedtoregisteredholdersand
underlying investors. Where electronic copies are issued, there are usually certain terms, outlined in
the auditor’s L/E, to be adhered to.
ObtainandfleelectronicallysignedPDFaccountsasthisisoftenrequiredforinvestorduediligence
requests(e.g.,Caymane-flingrequirement).

















39
AIMA’s OAFD Guide 2008
Appendices
APPENDIXE-Typicalcontinuingobligationsimposedbylistingrules
(see Section 6.8)
The overriding obligation imposed is that the information necessary to enable the public and shareholders to
evaluatethefnancialpositionoftheFundandtoavoidthecreationofafalsemarketintheFund’sshares
must be made public knowledge without delay.
Thismeansthattherelevantstockexchangewillrequirethatanannouncementbemadeofsuchinformation
as soon as possible. The stock exchange releases such announcements to the Regulatory News Service, which
feeds summary information to various services such as Bloomberg and Reuters. This overriding obligation
does not prevent the Fund from disclosing information to its advisers, parties with which it deals, or to any
regulatory or statutory authority. However, in such cases, procedures must be in place to prevent persons
with this information from dealing in shares before the information becomes public.
If the Fund is listed on more than one stock exchange, the Fund must usually ensure that the same information
is provided to each stock exchange.
Any announcement released by a Fund must contain all material information relating to the matter being
announced.
Certain routine announcements (e.g., the Fund’s net asset value per share) must typically be sent to the
stock exchange at the same time as they are released to the market. The Fund’s Administrator would
normally prepare and send such routine announcements to the stock exchange.
The Fund will also typically be obliged to notify the stock exchange of interests (that it is aware of) in the
Fund’s shares held by certain persons such as the Fund’s Directors and certain family members and the Fund’s
Investment Manager.
Where the Fund’s shares carry voting rights, a Fund may be obliged to notify the stock exchange of the
holdingsofcertaincontrollingshareholders.Forexample,theIrishStockExchangerequiresnotifcationof
the holdings of:
any person who is entitled to exercise, or to control the exercise of, 30% or more of the rights to vote
at general meetings of a Fund; or
anypersonwhoisabletocontroltheappointmentofDirectorswhoareabletoexerciseamajority
of the votes at the Board meetings of the Fund.


The Fund may also be required to adopt rules prohibiting certain persons (e.g., the Directors and the
Investment Manager) from dealing in the Fund’s shares at any time when they are in possession of price
sensitive information.
40
AIMA’s OAFD Guide 2008
Appendices
ThestockexchangewilltypicallyrequiretheFundtoprepareanannualreportincludingfullauditedfnancial
statementsandasemi-annualinterimreportincludingunauditedfnancialstatements.Theannualandinterim
reportsmustbesenttoshareholderswithinacertaintimeperiodoftheendofthefnancialyearandmustbe
received by the stock exchange within the same timeframe. Audited annual reports and unaudited interim
reports must typically be prepared in accordance with stock exchange policy and acceptable accounting
standards.
Under the rules of the relevant stock exchange, certain issues must be voted on by the shareholders before
aFundmaytakeanyaction.Forexample,therulesoftheIrishStockExchangerequireashareholdervote
in respect of:
any proposed material change in the investment policy and/or objective of the Fund (only if the
change is within three years from the date on which the Fund commenced operations);
certain related party transactions;
any proposal to change the open or closed-ended status of the Fund (shareholder approval is not
necessary where this fact has been disclosed in the listing particulars of the Fund);
any matter of which the Fund or its sponsor is aware which could materially adversely affect the
rights attaching to the shares in a manner which is not provided for in the listing particulars of the
Fund; or
any proposal to issue shares at less than the net asset value per share, where those shares are not
offeredfrstonapro-ratabasistoexistingshareholders.





Inexceptionalcircumstances,theIrishStockExchangereservestherighttorequirepriorshareholderapproval
of any proposal which may result in a substantial change in the nature and substance of a Fund.
Iftheapprovalofshareholdersisrequiredonanymatter,aFundmustsendacirculartoshareholders.The
circular should be submitted to the relevant stock exchange in draft form (unless it relates solely to an Annual
General Meeting at which only ordinary business is to be conducted).
41
AIMA’s OAFD Guide 2008
Appendices
APPENDIXF-AIMA’sIndustryGuidanceonSideLetters
Following discussions with the UK’s FSA as to clarifcation of various issues arising out of its Feedback
Statement 06/2 (FS06/2) regarding the use and disclosure of side letters, AIMA issued this Industry Guidance
(which is accessible to the public via AIMA’s site).
The decision whether to follow this Industry Guidance is for the frms concerned. However, the FSA has
revieweditandconfrmedthatitwilltakeitintoaccountwhenexercisingitsregulatoryfunctions,although
this cannot affect the rights of third parties.
ThisisnotFSAGuidanceand,intheeventofanyconfict,theFSAHandbookprevails.
Insummary,frmswillberequiredtodisclosetheexistenceofsideletterswhichcontain“materialterms”,
andthenatureofsuchterms,wherethefrmisapartytothesidelettersorisawarethataFundofwhich
thefrmoranaffliatedentityistheInvestmentManagerisapartytothem.Firmswillnotberequiredto
disclose the existence of side letters which contain no material terms.
Amaterialtermcanbedefnedas:
“Anytermtheeffectofwhichmightreasonablybeexpectedtobetoprovideaninvestorwithmorefavourable
treatment than other holders of the same class of share or interest which enhances that investor’s ability
either (i) to redeem shares or interests of that class or (ii) to make a determination as to whether to redeem
shares or interests of that class, and which in either case might, therefore, reasonably be expected to put
other holders of shares or interests of that class who are in the same position at a material disadvantage in
connectionwiththeexerciseoftheirredemptionrights”.
Common examples of terms which are likely to be regarded as material terms would include preferential
redemptionrights(includinganagreementtoacceptashorternoticeperiodforredemptions),“keyman”
provisions,redemption“gate”waiversandportfoliotransparencyrights.Commonexamplesofnon-material
termswouldincludefeerebatesand“mostfavourednation”clauses.
A term which would otherwise be a material term may not, however, be a material term if it does not, in
practice, provide one investor with more favourable treatment. For example, where a side letter contains
a term granting a shorter notice period for redemptions, but the fund undertakes to accept an identical
notice period in respect of all other investors in the same share class, the term would be “cured” of its
materiality.
Firms should give a brief description of material terms contained in side letters which have been entered
into(forexample:“wehaveenteredintosideletterswithinvestors,whichcontainmaterialtermswhich:(a)
grantpreferentialredemptionrights;(b)containa“keyman”provision;(c)[etc]”).
Firms are not expected to disclose the number of side letters, the dates on which they were entered into or
the parties to them.
Where side letters containing material terms have been entered into with investors whose shareholding or
interest,individuallyorinaggregate,issignifcant(i.e.,inexcessof10%),frmsshouldconsiderhighlighting
this fact.
42
AIMA’s OAFD Guide 2008
Appendices
Initially, frms will be expected to make disclosure by 31st October 2006 of all material terms contained
in side letters entered into prior to that date. Such disclosure should extend to all side letters containing
material terms, whether entered into before or after the publication of FS06/2, other than side letters
entered into with investors who have previously redeemed their shares or interests.
Thereafter, frms will be expected to keep this disclosure reasonably up-to-date and to make reasonably
timely disclosure where a side letter is entered into which contains a material term of a category not
includedinthefrm’spreviousdisclosures.
Firms should make disclosure of relevant side letters both to existing and to prospective investors.
Inthecaseofexistinginvestors,inparticular,frmswillneedtoconsidertowhomitisappropriatetomake
the disclosure (for example, the registered holder or, where relevant, the holder’s authorised representative
such as its Investment Manager).
Firmsareatlibertytoselectthemethodbywhichtheymakedisclosure.Itisanticipatedthatmanyfrmswill
choosetodosointheirmonthly,quarterlyorhalf-yearlyinvestorreports/newsletters.
Since the publication of AIMA’s Industry Guidance on 27 September 2006 members of AIMA and others have
raisedcertainissuesrelatingtotheinterpretationofthesideletterdisclosurerequirement.AIMAhasdiscussed
these issues with the FSA and is now publishing this Supplement to the Industry Guidance.
ThedecisionwhethertofollowthisSupplementtotheIndustryGuidanceisforthefrmsconcerned.
This is not FSA Guidance.
Therequirementtodisclosetheexistenceofsideletterswhichcontainmaterialtermsandthenatureofthose
terms(the“disclosurerequirement”)appliesonlytoafrmwhichisboth(1)anFSAregulateddiscretionary
investmentmanagerwhichemployshedgefundtechniquesand(2)anauthoritativesourceofinformationfor
fundinvestorsontheinvestmentstrategy,riskprofleandrelatedmattersaffectingtherelevantfund(“an
authoritativesourceofinformation”).Adiscretionaryinvestmentmanagerwillberegardedasanauthoritative
source of information if it is primarily responsible for generating the substance of such information.
The disclosure requirement applies to discretionary investment managers whether they publish such
information directly to fund investors or indirectly through the provision of such information to a third party,
such as a fund administrator, which then publishes the information.
43
AIMA’s OAFD Guide 2008
Appendices
Thedisclosurerequirementdoesnotapply(a)tofrmswhichonly(1)marketsharesorinterestsinafund
and/or (2) execute trades for the account of a fund and/or (3) give investment advice in relation to the
investment of a fund’s assets but which (4) do not exercise any discretionary investment management
authorityoverthefund’sassetsnor(b)tofrmswhicharefundofhedgefundmanagers.
The disclosure requirement does not apply to a frm which is a party to a side letter, but is not itself
an authoritative source of information, in circumstances where an affliated investment manager is an
authoritative source of information (for example, this would cover the situation where a US or other non- UK
affliateofthefrmistheauthoritativesourceofinformation).
Thereremainanumberof“greyareas”inrelationtotheapplicationofthedisclosurerequirementincertain
situations.Thesesituationsinclude(1)whereafrm(a)isnotapartytocertainsidelettersbutisaware
thatafundofwhichanaffliatedentityistheInvestmentManagerisapartytothem,(b)isanauthoritative
source of information but (c) has no or limited contact with investors and prospective investors because all or
mostofsuchcontactistheresponsibilityofanon-UKaffliatedmanager(suchasaUSaffliatedmanager)and
(2)whereafrmhasresponsibilityforgeneratingonlypartofsuchinformationinconjunctionwithanon-UK
affliatedmanagerwhichalsogeneratespartthereof.
AIMA intends to continue its dialogue with the FSA in relation to these grey areas and expects to publish
further supplements to its Industry Guidance when the position is clearer. The FSA has indicated to AIMA
that until then it will not insist on compliance with the disclosure requirement in relation to such areas.
However,frmswhichareinanydoubtastotheneedforcompliancearerecommendedtoseekappropriate
professional advice.
TheFSAhasconfrmedtoAIMAthatitwillconsiderthatcompliancewiththeinitialdisclosurerequirement
by31October2006willbesatisfedwherefrmsmakesuchdisclosureintheirinvestorreports/newsletters
which are sent out in early November 2006.
44
AIMA’s OAFD Guide 2008
Appendices
APPENDIXG-CaymanIslandsflingandregulatoryrequirements
A fund vehicle organised under Cayman Islands law, whether in corporate, partnership or trust form, is
required to be regulated under the Mutual Funds Law (the “Law”) if it issues equity interests which are
redeemableorrepurchasableattheoptionoftheinvestor.Thereisanexemptionfromthisrequirementif
thereareffteenorfewerinvestors(ofrecord),amajorityinnumberofwhichcanappointorremovethe
“operator”(theBoardofDirectors,generalpartnerortrustee,asthecasemaybe).Forthepurposesofthis
note,itisassumedthattheminimuminvestmentwillbeatleastUS$100,000orequivalent,inwhichcase
registration is non-discretionary.
Otherthanarequirementthattheannualauditbesignedoffbyalocalfrm,theLawdoesnotmandatethat
anyserviceproviderstoaCaymanIslandsdomiciledFundbelocatedinthejurisdiction.Likewisethereisno
restriction on the residence or domicile of Directors. To the extent services are provided locally, the supplier
itselfwillberequiredtoholdappropriatelicences-forexample,administration,investmentmanagementor
advice,trusteeshipsandprovisionofDirectors,registeredoffceorcustodyfacilities.
WhereaFundisrequiredtoregisterundertheLaw,theprincipalrequirementsareasfollows:
flingofformMF1(and,inpractice,acopyoftheofferingdocument)alongwitharegistrationfee
of US$3,048.78;
notifyinganysubsequentchangestotheparticularsdisclosedintheformMF1and,inpractice,any
supplement or revisions to the offering document; and
flingofauditedfnancialsand(forfscalperiodsendingafter1stJanuary2007)anelectronicsummary
report“FAR”withinsixmonthsoftheendofsuchperiod.



The government fees payable on incorporation/registration of each fund vehicle are as follows:
Exempted Company – US$573.17
1
;
Exempted Limited Partnership – US$914.63;
Exempted Trust – US$609.76; and
Foreign Company – US$1,036.59.
Thisistheminimumgovernmentfeeandisbasedontheauthorisedsharecapitalofacompany.TypicallyaFund
willbestructuredsuchthatitfallswithinthisminimumfeeband.




Following incorporation/registration, annual government fees will generally be the same as the initial fee
paid. The annual fee payable to the Cayman Islands Monetary Authority for a registered mutual Fund is also
the same as the initial registration fee (currently US$3,048.78).
45
AIMA’s OAFD Guide 2008
Appendices
APPENDIXH-WorkingGroupmembers
StevenWhittaker Simmons&Simmons
DermotButler CustomHouseAdministration&CorporateServicesLtd
Robert Kelly Baronsmead Partners LLP
HenryHarford Maples&Calder
ShelbyduPasquier Lenz&Staehelin
Deborah Tanner Olympus Capital LLP
Olwyn Alexander PricewaterhouseCoopers LLP
MichaelTannenbaum TannenbaumHelpernSyracuse&HirschtrittLLP
PaulHale Simmons&Simmons
AIMA Andrew Baker
Mary Richardson
Timothy Darvall Baker Steel Capital Managers LLP
Timothy Spangler Kaye Scholer LLP
MicheleGibbs TannenbaumHelpernSyracuse&HirschtrittLLP
46
AIMA’s OAFD Guide 2008
Appendices
APPENDIXI-AboutAIMA
AIMAisthehedgefundindustry’sglobaltradeassociation.Itisnot-for-proftandhasalmost2,000corporate
members in 47 countries. It has a strong reputation built on professionalism, expertise, leadership and
innovation. Its direction is led by some of the most prominent players in the industry who - together with all
member companies - are committed to building a robust and professional industry.
AIMAfocusesspecifcallyonhedgefunds,managedfuturesandmanagedcurrencyfundsratherthanprivate
equity,venturecapital,realestate,etc.
Itsobjectivesare:
to provide an interactive and professional forum for our membership and act as a catalyst for the
industry’s future development;
tobethepre-eminentvoiceoftheindustrytothewiderfnancialcommunity,institutionalinvestors,
the media, regulators, governments and other policy makers; and
toofferacentralisedsourceofinformationontheindustry’sactivitiesandinfuence,andtosecure
its place in the investment management community.



AIMA’s membership includes fund of funds managers, institutional investors, hedge fund managers, prime
brokers, lawyers, fund administrators, accountants, exchanges and other specialist service providers.
Focusing on education, regulation, sound practices and government relations, AIMA is a business-to-business
association that communicates with the fund industry, institutional investors, policymakers, regulators and
thespecialistfnancialmediaaroundtheworld.
Key products created and distributed by AIMA include:
Guide to Sound Practices for Hedge Fund Valuation (2007)
Series of generic due diligence questionnaires for the selection of managers and service providers
(available to AIMA members and institutional investors) - (fourth edition, 2007)
‘Asset Pricing and Fund Valuation in the Hedge Fund Industry’
Guides to Sound Practices for European (2007), Canadian (2004) and Asian Managers (2005)
Guide to Sound Practices for Business Continuity Management for Hedge Fund Managers (2006)
Guide to Sound Practices for Hedge Fund Administrators (2004)
Guide to Fund of Funds Management and Investment (2002)
Market Neutral and Hedge Strategies research (2002)
AIMAJournal(publishedquarterly)









47
AIMA’s OAFD Guide 2008
Appendices
APPENDIXJ-AbouttheSponsors
Simmons&Simmonshavebeenadvisinghedgefundsponsorsandmanagersfromthefrstdevelopmentofthe
hedge fund industry in Europe.

OurhedgefundpracticeisthelargestofanyUKlawfrm.ThestrengthofthepracticeisrecognisedbyLegal
500,theindependentUKlegaldirectory,whichdescribesitas“theleadingfrminhedgefunds”.Ourhedge
fund team is predominantly based in London where the core team is led by 11 partners and supported by
35 associates. Specialist lawyers outside the core team are also involved to provide the full range of legal
servicesrequiredbyhedgefundclients.

Ourhedgefundteamincludesleadingpractitionersinthefeld.IainCullen,RichardPerry,NeilSimmonds
andStevenWhittakerareallrecognisedas“leadingindividuals”inLegal500and/orChambers&Partners.

We act for many of the best known hedge fund sponsors and managers. Our clients include both specialist
hedgefundfrmsaswellasmanyinstitutionalfundmanagementhouses.

www.simmons-simmons.com
CustomHouseAdministration&CorporateServicesLtdisaspecialistalternativeinvestmentandhedgefund
administrator–indeedtheydescribethemselvesas“TheSpecialistFundSpecialist”.CustomHousecoversall
aspects of the day to day operations of the fund, including maintaining the fund’s books and records, carrying
out the valuations, calculating the NAV and handling all subscriptions and redemptions, as well as overseeing
payment of the fund’s expenses and liaising with the auditor. Custom House, which administers in excess of
US$25billion,andwhichwasthefrsthedgefundadministratortobeawardedaMoody’sMQ(Management
Quality) Rating, have since January 2007 been able to offer a 24/7 service through representative offces
in Chicago and Singapore. Custom House is authorised by the Irish Financial Regulator, under Section 10 of
the Investment Intermediaries Act, 1995 to act as an administrator of collective investment schemes. The
authorisationdoesnotextendtotherepresentativeoffcesinChicagoandSingapore.CustomHouse,which
operates out of four Victorian town houses on the banks of the River Liffey in Dublin, is also authorised to act
as a Paying Agent for Irish Stock Exchange listed asset-backed security and closed-end funds.
www.customhousegroup.com
48
AIMA’s OAFD Guide 2008
Appendices
AbouttheSponsors
Baronsmeadisanindependent,specialistbrokerprovidingfnancialrisksinsurance,guidanceandadviceto
investment funds. We provide protection to the investment industry from the legal, regulatory and operational
risks they face.
Ourspecialistfnancialrisksinsuranceproductsinclude:
As a dynamic business, we continue to expand our products and services in response to our clients’
requirements.
Ourclientsrangefromlongestablishedfundgroupstostartupfunds,allofwhombeneft
fromourpromiseofdeliveringqualityservice.Weactfortraditionalandalternativefundsandmanagement
groups.
We are located in London and Dublin, at the heart of the European funds industry, ideally placed to provide
the best service to our clients.
Baronsmead Partners LLP is authorised and regulated by the Financial Services Authority (FSA) and the Jersey
Financial Services Commission (JFSC). We are members of the Irish Funds Industry Association, Jersey Finance
and are also accredited Lloyd’s Brokers.
Directors’andOffcers’LiabilityInsurance
Professional Indemnity Insurance
Fund and General Partner Corporate Liability Insurance
Employee Dishonesty and Third Party Computer Crime Insurance
ERISA Fiduciary Dishonesty Bond and ERISA Fiduciary Liability Insurance
Prospectus Liability
Outside Directorship Liability Insurance
Employment Practices Liability Insurance
Pension Trustee Liability Insurance









49
AIMA’s OAFD Guide 2008
Appendices
ALTERNATIVE INVESTMENT
MANAGEMENT ASSOCIATION
Enhancing understanding,
sound practices
and industry growth
The Alternative Investment Management Association
2nd Floor, 167 Fleet Street, London EC4A 2EA, UK
Tel +44 (0)20 7822 8380
info@aima.org
www.aima.org

Sign up to vote on this title
UsefulNot useful