• Investment policy: the fund’s investment strategy and the risks involved
• Commercial terms: fees & expenses; termination rights; exit terms etc.
• Performance measurement: material exposure to hard-to-value assets; methods used in valuing hard-to-value assets; and the use of side-pockets
• Agreed information reports to counterparties (lenders, prime brokers, dealers)

The issue of disclosure features throughout the standards covering each section.

• Segregation of functions in valuation specifically involves appointment of an independent and competent third party valuation service provider; segregation of the valuation function from the portfolio management function; and preparation of a Valuation Policy Document which delineates all aspects of valuation processes/procedures in respect to the fund.
• Approach to handling and valuing hard-to-value assets: if hard-to-value assets are valued in-house, the Valuation Policy Document should include details of a hierarchy of pricing sources/models; broker quotes (if any); and use of side pockets (only if the fund governing body agreed).
• Investor disclosure of the governance arrangements and hard-to-value assets: any material increase in the percentage of the fund’s portfolio invested in hard-to-value assets and value of side pockets should be reported.

Firstly the manager should create a risk framework which sets out the governance structure for its risk management activities & control mechanism to keep the risks within the manager’s risk tolerance.

Portfolio risk: all risk management processes should be explained to key staff (portfolio managers, traders, risk managers and the fund governing body). Separation of the risk management function from portfolio management is vital to manage conflicts of interest. Risk-monitoring reports should be regularly submitted. Within portfolio risks there are also liquidity risk, market risk, and counterparty risk which should all be managed:

• Liquidity risk: forecast the liquidity position and track liquidity measures; conduct stress-testing /scenario analysis of the fund’s liquidity position.
• Market risk: measures to identify market risks, conduct regular stress-testing to assess impact of extreme market occurrences on the portfolio value.
• Counterparty credit risk: a process for setting up trading relationships on behalf of the fund.
• Control processes: set up limits and sub-limits to ensure the fund adheres to its stated objectives, policies/strategies.

All the above should be frequently disclosed to the investor.

Operational risk

• Operational risks include clear separation of valuation, risk management and compliance functions from portfolio management with separate reporting lines to CEO, CIO etc.; documentation of operational procedures and training of staff; developing internal control measures to prevent misappropriation of client money; disaster recovery measures (offsite data back-up facilities etc.), IT security and implementing local conduct of business rules and regulations.

Outsourcing risk

• Proper due diligence should be conducted on all third party service providers (prime brokers, auditors etc.), their activities, names, funding arrangements, nature of any special commercial terms, monitoring procedures should be disclosed in due diligence documents.

Where there is no fund governing body material adverse changes to fees and expenses payable by the fund to the manager or the redemption rights or material changes to the fund’s stated strategy should be done with investor consent.

The composition of the fund governing body and the governance processes should be monitored and adjusted (if needed). The fund governing body should regularly meet and the meetings should be documented.

Regular reports on compliance with laws and regulations should be performed by the administrator.

Market abuse: there should be a policy on market abuse prevention, as well as compliance procedures that can identify and prevent breaches of market abuse laws.

Proxy voting: a policy on proxy voting should be in place to allow investors to evaluate the manager’s approach to proxy voting.

Borrowing stock: manager should not borrow stock in order to vote, although there might be specific situations where it is acceptable.