AIMA's Offshore Alternative Fund Directors' Guide 2nd Edition 2008

ALTERNATIVE INVESTMENT MANAGEMENT ASSOCIATION

Alternative InvestmentManagement Association

AIMA’S OFFSHORE ALTERNATIVE FUND DIRECTORS’ GUIDE

2nd Edition, 2008

Sponsored by

� AIMA’s OAFD Guide 2008

INDEX Foreword 4 1. Introduction 5 1.1 Tax issues 5 1.2 Independent Directors 6 1.3 LocalDirector/Officerrequirements 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’andOfficers’LiabilityInsurance 25 7.1 General guidance 25 7.2 How to obtain cover 26 7.3 DirectorindemnificationandD&Opolicydeductibles 27 7.4 Level of cover 27 7.5 Key exposures to consider 29 7.6 Key/problematic exclusions 29

�AIMA’s OAFD Guide 2008

CopiesoftheGuidewillbeavailableonlyinhardcopy.AIMA members will receive the first 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 CaymanIslandsfilingandregulatoryrequirements 44 H AIMA Working Group members 45 I About AIMA 46 J About the Sponsors 47

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FOREWORD

The original OffshoreAlternative FundDirectors’Guide was the initiative of members of AIMA’s Sound Practices’andAlternativeInvestmentResearchcommitteesin2004.TheGuidewasfirstpublishedinJune2005 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.Itcontainssomedetailastorequirementsandgeneraladviceonseveralimportantissues, including in relation to review of the annual audited accounts and issues relating to Directors’ and Officers’liabilityinsurance.Naturally,thepotentialimpactoftaxationonaFundisanimportant“driver”;consequently,considerationoftheimpactsoftaxationinvariousspecificjurisdictionsaffectingtheFund,service providers and the Directors is included.

The2007revisionoftheGuideaddsrecommendationsonindependenceandconflictsofinterest,Directors’dutiesandactivecontribution,astoexpensesandmeetingagendaitemsandfiduciaryliability.Italsocoversauditors’ 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 inrespect of Cayman Island Funds are also set out in an Appendix.

TheGuidedoesnottakeaccountofanyfundgovernancerecommendationswhichmaybemadeinthefinalreport 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.

TheGuideisnottobetakenortreatedasasubstituteforspecificadvice,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.

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StevenWhittakerChairofWorkingGroup

© 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.


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 suchas the locationofBoard meetings or composition of the Board can, however, affect the Fund’s susceptibility to tax or tax residence.Taxissuesareimportantforsuchcompaniesbecausethedomesticlawofmosttaxingjurisdictionsspecifiesthecircumstancesinwhichtherelevanttaxingauthoritiesmayimposetaxationuponcompanieswhicharenotincorporatedinthejurisdictioninquestion.

Forexample,ifanoffshorecompanyweretobetreatedastaxresidentintheUK,itwouldbesubjecttoUKcorporationtaxonallitsprofits,wheresoeverandhowsoeverearned.ItwouldalsobeliabletowithholdUK income tax from any interest payments. Any company incorporated outside the UK could, in certain circumstances, become UK taxable.

AstotheUS,anoffshorecompanythathasUStradingactivityusuallyseekstobringitselfwithina“safeharbour” from taxationwhich isprovided in theUS tax regulations. In short, aFund that trades stock,securities or commodities for its own account can avoid US taxation on that activity. Exceptions are dividends andnon-portfoliointerest;thesearesubjecttowithholdingtax.OnechallengingareatodayarisesfromthecreativitythatmanyFundsponsorsandInvestmentManagersexhibit.Productsnolongerneatlyfitintothecategoryofstock,securitiesorcommoditiesand,therefore,cannotfitintothesafeharbour.Suchactivitiesriskbeinglabelledastradeorbusinessactivityand,therefore,maybecomesubjecttoUStaxationatfullUScorporateincometaxrates.Forexample,aFundmaybesubjecttoUStaxoncertainofitsinvestmentsin 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,suchaswithholding taxes, under US and UK law.

Itis,therefore,importantthatanoffshorecompanywhichisincorporatedinataxneutraljurisdictiondoes 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.

1.1 Taxissues


Introduction

Best practice for any Fundwould be to have amajority of independent offshoreDirectors and to avoidappointing Directors who represent the advisers or service providers to the Fund because of the potential for conflictsofinterest.IndependencehasbecomeanessentialelementofaFund’sBoard,fromtheperspectiveofinvestorexpectation.Thisremainstheexpectation,eventhoughthereisnoregulatoryrequirementformostHedgeFundsorFundsofHedgeFundsunderthelawsofthejurisdictioninwhichtheyareincorporated(e.g.,Cayman Islands, Bermuda, BVI, Luxembourg and the Channel Islands) to appoint independent Directors.

Note,however,thattherulesofcertainstockexchangesdoimposerequirementsforaminimumnumberofindependent 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.ADirectorwillbe considered independent where (i) he has no executive function with the Fund’s Investment Manager, investmentadviserandtheiraffiliatedcompaniesand/or(ii)hehasanexecutivefunctionwithanyotherservice provider but is not responsible for carrying out work on behalf of the Fund. However, consideration shouldbegiventothepotentialforconflictsofinteresttoarisewithanappointmentofaDirectorwhoalsorepresentsanadviserorserviceprovidertotheFund(seethefirstparagraphunderSection2.1below).

ForaFundofHedgeFundswhichseeksalistingontheLondonStockExchange,thelistingrulesrequire,amongotherthings,thattheFundhasamajorityofindependentDirectors,anindependentChairmananda 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 applyforauthorisationforpublicsaleinSwitzerlandwillberequiredbytheSwissauthoritiestoputinplacea Supervisory Committee – see AppendixB.

1.2 IndependentDirectors

Funds incorporatedincertainjurisdictionsarerequiredtoappointoneormorelocallyresidentDirectors.Suchjurisdictionsinclude:

Otherjurisdictions,suchasMalta,mayhaverequirementstoappointlocallyresidentDirectors.

Funds incorporated in theCayman Islands, theBritishVirgin IslandsandLuxembourgarenot required toappoint locally resident Directors.

1.3 LocalDirector/Officerrequirements

Bermuda: if the Fund is listed on a recognised stock exchange, a Bermuda resident representative is required;iftheFundisnotsolisted,eitheraBermudaresidentcompanysecretaryandaBermudaresident 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;andJersey:twoJerseyresidentDirectorsarerequired.

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Introduction

Directors are drawn from a variety of sources and skills. When a Hedge Fund is launched, the Investment Manager or promoter usually identifies and arranges appointment of the initial Directors; they are often personal orbusinessacquaintancesoftheInvestmentManager,ormaybeemployedbytheAdministratororbytheInvestmentManagerorarechosenfromafirmwhichspecialisesinprovidingindependentDirectorstoFunds.However,withincreasedregulatoryandfiscalscrutinyofoffshoreFundsandwiderissuesastocorporategovernancegenerally,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,includingtheirriskprofileandliquidity.Theyneedtohavetheabilityandexperience 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 servicesfirm.Itisnotuncommonforsuchcandidatestohaveseveralhundredotherdirectorshipsandverylittletime and attention to devote to another directorship.

PotentialDirectorsofaFundshouldalwaysbemindfulofanyactual,potentialorapparentconflictofinterestand appropriate disclosures should be made to the Fund’s investors and the Board; the Board may then excuse anyDirectorconcernedfromdiscussionand/orvotingonaparticularsubjectwhenaconflictarises.

1.4 HowtoselectandappointDirectors

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, therearenoprovisionsforanyfixedtenureorforretirementandre-appointment.Thearticlesofassociation(orequivalent)ofaFundwill,however,usuallyspecifytheeventsorcircumstancesinwhichaDirectormayberemovedfromoffice.

1.5 Termsofappointment

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:

1.6 Recommendedpractice

the majority of the Directors and the majority of those Directors attending each Board meeting (orcommittee 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)canbe resident in the US. Accordingly, sensitivity to tax issues may arise if a US manager is deferring fees in the offshore vehicle;theBoardofDirectorsshouldhavesufficientcollectiveexpertiseandexperienceamongitsmemberstobein 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;andtelephone 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.

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The Board

2. THEBOARD

AnyDirectorshouldhavesufficientandrelevantknowledgeandexperiencetocarryouthisdutiesasDirector.Heshouldalsobeabletodevotesufficienttimetocarryoutthosedutiesandthatshouldbereflectedinhisremuneration (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 serviceproviderstotheFundbecauseofpotentialforconflictsofinterest.

There are no hard and fast rules about choosing ‘good’ Fund Directors but the following guidance may be helpful:

2.1 Skills,experience,ageandothercommitments

a diversity of skills, experience and backgrounds can be useful in ensuring that key specialist areas areadequatelycovered.Forexample:priorexperienceonFundboardsand/orofHedgeFunds;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.DirectorsshouldalsobemadeawareoftheobligationsupontheminthejurisdictionoftheFund concerned;itisimportanttogetthebalancerightbetweenDirectorswhomaybeaffiliatedwiththeInvestmentManager 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,raisequestionsorseekreportsonareas 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.

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It is recommended that Directors should:

2.2 Directors’remuneration

settheirowncompensation,toavoidpotentialconflictsinhavingitsetbytheInvestmentManagerthey oversee; andhave the power, in appropriate circumstances, to hire their own lawyer to advise them (paid for out of the Fund’s assets).

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Currently, the typical remuneration ranges from very low (e.g., $5,000 p.a.) to approximately $15,000 p.a. or more.SomeprofessionalDirectorsmayaskformore.RemunerationmaybelowerinoffshorejurisdictionsandhigherinEuropeanjurisdictionssuchasIrelandandLuxembourg;€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.


The Board

TypicalrequirementsofFundDirectorsmightbe:attendanceatquarterlyBoardmeetings,withsetagendaandwrittenpaperscirculatedinadvanceofthe 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 ofadditional or replacement Directors, changes to service providers’ contracts or to the prospectus.

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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.

2.3 Choosinga(standing)FundChairman

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:

2.4 Whetherornottousesub-committees

audit;the process of granting discretionary waivers; andpricing/valuation.

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Anysub-committeesshould,however,beformallycreatedwithwrittentermsofreferenceratifiedbytheBoard. All proceedings and decisions of sub-committees should be formally reported to the Board and fully ratifiedbyresolution.

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.

ThematteroffiduciaryliabilitywilloftenneedtobeaddressedwhenattractingDirectors.SeeSection7ofthisGuidewithregardtoDirectors’andOfficers’liabilityinsurancecoverandtheissueofindemnification.

2.5 Liability

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Board meetings

3. BOARDMEETINGS

BoardmeetingsshouldbeheldsufficientlyfrequentlysothattheBoardiseffectivelyabletocarryoutitsrole(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).

ThefrequencyofBoardmeetingsneededtoenabletheBoardtoperformitsroleeffectivelyisultimatelyamatter for each Board to decide in light of its duties. However, relevant guidance on broader tax issues must betakenintoaccount.Forexample,wheretheFundhasaUK(or,totakeatleastoneotherjurisdictionapplying similar tax restrictions, an Irish) Investment Manager or Director, it is recommended that the Board oftheFundshouldmeetquarterlyoutsidetheUK(orIreland)inordertoreducetheriskthattheFundcouldbecome taxable in the UK (or Ireland).

3.1 Frequencyofmeetings

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,thefollowingrequirementsshouldbecompliedwithwheretherelevant Director is a UK or Irish resident:

3.2 PhysicalvsTelephoneBoardmeetings

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.

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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,althoughitisalwaysdesirabletoavoidthiswherepossible.

ItisoftenthecasethatoffshorejurisdictionsdonotrequireanyBoardmeetingsforacompanyincorporatedinthatjurisdictiontobeheldinanyparticularlocation–forexample,aCaymanIslandsincorporatedFundisnotrequiredtoholdanyBoardmeetingsintheCaymanIslands.

In practice, due to a mixture of travel, cost and convenience issues, the Boards of offshore Funds do not meet intheirjurisdictionsofincorporationeitheratalloronaregularbasis.WhereanoffshoreFund’sBoardchooses 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.

3.3 LocationofBoardmeetings

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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.

3.4 Recordkeeping

These are typical matters which might be considered at Board meetings:

3.5 Example:Boardmeetingagenda

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’andOfficers’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; andupdates on matters of regulatory, accounting, audit or industry importance which may impact on the Fund.

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Relationship between the Board and Investment Manager

4. RELATIONSHIPBETWEENTHEBOARDANDINVESTMENTMANAGER

The InvestmentManagerwill, for legalpurposes,oftenbetreatedunderthe lawsof its jurisdictionasafiduciaryoftheFund(e.g.,thisisthecaseforUKbasedInvestmentManagers).Asaresult,theInvestmentManager may owe several duties to the Fund, including:

a duty of good faith;adutytoavoidconflictsofinterestbetweenitselfandtheFund,aswellasbetweentheFundandother clients of the Investment Manager; andadutynottoprofitsecretlyfromtheFund.

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ThescopeofanyfiduciarydutiesowedbytheInvestmentManagertotheFundwillbebasedonthescopeoftheInvestmentManager’srole.Asaresult,theInvestmentManagementAgreement(“IMA”)andrelateddocumentation 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 thatsuchfiduciarydutieshavebeenbreached.Incertainrespects,theFundandtheInvestmentManagermay limit the scope of thesefiduciary duties bymutual agreement, although such limitations should beexplicit and unambiguous.

Inadditiontofiduciaryduties,anInvestmentManagermayalsohaveotherobligationstotheFundforwhichclaims may be made in case of breach. These could include causes of action for:

negligence;misrepresentation; andbreach of contract.

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The Board’s ongoing review of the Investment Manager’s performance will necessarily include an evaluation ofwhetherornotthesedutieshavebeenfulfilled.

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.

TheBoardisresponsibletotheshareholdersforensuringthattheFundadherestoitsinvestmentobjectivesand restrictions. Thus, regular reporting to the Board is essential to enable the Board to determine whether theInvestmentManageriscontinuingtoactwithinitsinvestmentmanagementparametersandthatno“styledrift”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:

4.1 MattersoverwhichtheInvestmentManagerhasdiscretionandmatterswhicharereservedto theBoard(and note Board responsibilities in ‘check list’ attached as Appendix C)

auditorsmayberequiredtoconsolidatetheaccountsoftheholderofthefoundershareswiththoseoftheFundiftheyprovide“control”oftheFundforaccountingpurposes;andexclusive voting rights must be disclosed in the prospectus.

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Relationship between the Board and Investment Manager

TheBoard’sinformationrequirementswilldependontheparticularstrategyoractivitiesoftheFund.Inallcases, such information should include copies of all information that is provided to investors (usually monthly orquarterlynewsletters),togetherwithkeydocumentsfiledonbehalfoftheFundwithregulatoryagenciesandexchanges.ThisinformationshouldbeexpandedatquarterlyBoardmeetings,toincorporateamoredetailedexplanationbehindanyperformanceorvaluationfigures.

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,subscriptionsandredemptionsshouldbereportedatregularquarterlyBoard meetings. Subscriptions and redemptions information should also be reported at any special Board meetingwhichoccursatacriticaltimefortheFundwhereredemptionrequestshavebuiltupandwouldhavea considerable impact on a particular dealing day. Examples of such circumstances could include:

4.2 NatureandfrequencyofinformationsuppliedtotheBoardregardingperformanceand subscriptionsandredemptions

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”.

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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:

4.3 Policiesonkeyoperationalissues

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,theDirectorsneedtobeprovidedwithsufficientinformationtoenable 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”.

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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:

theexpertiseandskillofthespecificindividualswithintheInvestmentManagerresponsiblefortheFund; andthe resources and commitment of the Investment Manager provided to the Fund.

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Relationship between the Board and auditors

5. RELATIONSHIPBETWEENTHEBOARDANDAUDITORS

ItisastandardrequirementforaFundtoproduceannualandsometimessemi-annualaccounts(orfinancialstatements). 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 theauditfirmitselfwillactuallyproducetheaccounts.

It is the Directors’ responsibility to select suitable accounting policies and apply them on a consistent basis, makingjudgementsandestimatesthatareprudentandreasonable.TheyarealsoresponsibleforensuringthatthefinancialstatementsgiveatrueandfairviewoftheFund’sstateofaffairsattheendoftheyearandoftheprofitorlossfortheyearinquestion.

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,requiretheinclusionofaspecificsectionon“StatementofDirectors’responsibilitiesinrespectoftheaccounts”.Attheveryleast,standardauditreportsusewordingtotheeffectof:“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 withgovernance”.Thesematterscoversuchareasasindependence,changesinaccountingpolicies,goingconcernissues, 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. Inaddition,auditorsusuallypresenttheirauditfindingstotheBoardfollowingtheaudit,asthefinancialstatements 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.

5.1 SupervisionandapprovaloftheFund’saccountsandtheauditprocess

The letterofengagementof theauditors toaFund incorporated inanoffshore jurisdiction, suchas theCaymanIslands,willusuallycontainaprovisionwhichimposesafinancialcapontheliabilityoftheauditorfor any losses arising out of a failure by the auditor to carry out its duties properly. The level of such a financial cap is typicallyamultipleof theannualaudit feeor,alternatively,a relatively smallmonetaryamount. 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 firm;accordingly, the outcome might vary from situation to situation.

The auditors of Funds incorporated in certain other jurisdictions, such as Ireland for example, are notpermitted 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.

5.2 Liabilitycaps



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 betweenauditfirms,betweenjurisdictionsandfromyeartoyearandaccordingtothenatureoftheFundandapplicable audit standards; matters typically covered, however, will include but are not limited to:

5.3 LettersofRepresentation

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;thattheinvestmentsandotherfinancialinstrumentsarevaluedinaccordancewiththecriteriasetout 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;astatementofunadjusteddifferenceswhichtheDirectorsapproveasimmaterialforrestatementofthefinancialstatements;andmanagement’s responsibility for assessing fraud risk.

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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 unqualified opinion; the schedule of investments, to ensure no breaches ofinvestment restrictions, as outlined in the prospectus, have occurred and that the Fund is following its documented investmentmandate; liquidity checks andany changesormatters of significancewhich 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 eachDirectorsufficienttimetoreviewthecontentsandincontext.Auditandaccountsproductiontimetablescanoftenbecomequitetight,soanadequateDirectorreviewperiodshouldbebuiltintothe timetable at the outset; andwhere 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 tohighlightfortheDirectorsanymattersofsignificancearisingduringtheyearandtoprovideanexplanationofanyqueriestheDirectorsmayhave.

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Briefly,whenconsideringhowDirectorsmayacceptorlimittheirownresponsibilityundertheL/R,theymaywish 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;aFund is often requiredby regulators or stockexchanges (suchas the Irish StockExchange), byprofessional investors themselves and/or by good practice, to appoint independent professionals to carry out certain functions, such as administration and custody;evenifsuchappointmentwerenotrequired,thespecialistnatureoftheskillswouldoftenmakethisa 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 reflectionofthatfactintheL/R–i.e.,providedtheyhaveexercisedduediligence(whichmayincludethe seeking of a separate representation comfort letter from the professional concerned), to ask non-executiveDirectorstotakeunqualifiedresponsibilitywouldoftenbeunreasonable.Thisapproachwillassistinreflectingappropriatelyintheauditprocessanddocumentationtheresponsibilitiesofthe Directors and those of such others; andauditpracticemaydifferinsomejurisdictions,mainlyarisingfromdifferencesbetweenaccountingstandards, audit standards, or fund law, regulation and practice (and therefore auditors’ assessment of their risk and responsibility).

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TherecansometimesbeanadditionalauditorrequirementforsomeoftherepresentationstobegivenbytheInvestment 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.


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,intermsoffiguresanditwill expect copies of all investment reports sent to investors by the Investment Manager, who should report totheBoardforeachofitsquarterlymeetingsastototalperformance,marketconditionsandanyproblemsencountered;suchreportswillexplainhowtheperformancewasachievedandwhatriskprofilewasadoptedto generate returns. The Board will also want to understand how the performance compares both with the Fund’sinvestmentobjectiveandwitharepresentativesampleofpeermanagers.

6.1 Reviewofinvestmentperformance

EveryFundisrequiredtostateitsinvestmentpoliciesandrestrictionsinitsprospectus,makingcurrentandprospective 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.

6.2 Monitoringadherencetoinvestmentpolicyandrestrictions

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 specificandexceptionalcircumstancesshouldtheInvestmentManagerhaveresponsibilityforvaluation.

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,difficulttradingmarkets,illiquidassets,sidepocketsorsubjectivity)totheBoardandanyValuationCommitteeonaregularbasisshouldbeputinplace.ThisallowstheBoardtodelegatetheresponsibilitybutalsotofulfiltherequirementthatthereisadequateoversightandsupervision.

AIMA’s“Guide toSoundPractices forHedgeFundValuation” (March2007)makes15 recommendations inrespect 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.

6.3 MonitoringNAVcalculation


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.

TheGoverningBodyoftheFundshouldensureadequatesegregationofdutiesintheNAVdeterminationprocess, 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,robustcontrolsoverconflictsofinterestshouldbeestablished.

Oversight of the entire valuation process and, in particular, resolution of pricing issues associated withhard-to-priceilliquidpositionsandexoticinstrumentsremainstheultimateresponsibilityoftheFund’s Governing Body.

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Recommendations on Governance

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,summarisinggrossand 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,highlightingkeyissuesbeingraised so that the Board is aware of common themes such as concerns about performance or concerns about efficientadministration.ItisadvisablefortheDirectorstobeawareofthesizeoftheshareholderbaseandhow it breaks down by type of investor.

6.4 Monitoringmarketingandinvestorrelations


Role of the Board

AML laws and regulations are detailed and technical in nature and have evolved and changed considerably overthelastseveralyearsinanumberofjurisdictions.AdetailedexplanationofAMLlawsandregulationsisbeyondthescopeofthisGuideexcepttonotethatthereisnoonesetofAMLcompliancerulesthatsatisfiestheneedsofalljurisdictions.AIMAhaspublishedanonlineAML‘Matrix’whichreviewstherequirementsinanumberofjurisdictions.

The recommendations of good practice for Boards of Directors in this context are as follows:

6.5 Anti-MoneyLaundering(AML)responsibilities

TheBoardshouldunderstandthenatureoftheAMLrequirementswhichapplyinrespectoftheFundand 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 thattheformalproceduresinplacearebeingadheredtoandthatanysuspiciousfindingswereraisedandinvestigatedaccordingly.Allsuspiciousfindingsandtheresultsofthesubsequentinvestigationshould be promptly reported to the Board.

TheBoardshouldadditionallyobtainandreviewtheAdministrator’sSAS70(orequivalentcontrolsreport, 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,giventheriskprofileoftheFund.

The AML policies and procedures adopted by the Administrator or the Investment Manager should beincompliancewiththeAMLlawsandregulationswhichapplytotheFundinitsjurisdictionofincorporationaswellasinthejurisdictionsoftheAdministratorandtheInvestmentManager.

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.Intheeventthattheredeeminginvestorrequeststhatredemptionproceeds 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.

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�0 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.

6.7 Provisionofinformationtoshareholders

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(suchasfinancialpenaltiesorapublicstatementcensuringtheFund,suchasatemporaryorevena 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.

6.8 Compliancewithlistingrulesandcontinuingobligations

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’sauditorisnotconflictedbyanyworkfortheInvestmentManagerandthatanypotentialconflicthasbeensatisfactorilyresolved.CertainauditortaxservicesmayrequireBoardpre-approvaltoensurethatareviewhasbeenconductedforconflicts.AnypotentialforconflictarisingfromtheAdministratorproviding‘middleoffice’functionsfortheInvestmentManagerand‘backoffice’functionsfortheFundshouldalsobedisclosed.

6.6 Reviewoftheappointmentandperformanceofotherserviceproviders

�1AIMA’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”agreementswiththeFundand/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,theBoardmayrequestthatmonitoringfor compliance with the terms is implemented and periodic reporting on same is made to the Board.

6.9 Sideletters

ThefirstconsiderationwhenasideletterisrequestediswhethertheFund’sprospectusand/orarticlesofassociation(orequivalent)permitstheFundtoenterintoasideletterinrespectoftherelevantspecialtermsand conditions. The Fund’s Directors should take legal advice if they are unsure of the position.

The Fund’s prospectus

TheDirectorsmustalsoconsidertheirfiduciarydutiesasDirectors,whichincludeadutytoactbonafideinwhat they consider to be the best interests of the Fund. This duty is owed to the Fund itself and the effect ofthisisthattheDirectorsarenotentitledtoconsidersolelytheinterestsofaspecificshareholderortheInvestment Manager in determining whether or not to enter into a side letter. For example, where greater portfoliotransparencyrightsarerequestedbyaninvestor,theDirectorsshouldconsiderwhetherthiswouldconferamaterialadvantageoverotherinvestorsandwhethertheirdutiesrequirethatthesametransparencyshould 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.

Directors’ duties

If,forexample,theFundislistedontheIrishStockExchange,notethatthelistingrulesrequiretheFundtoensureequalityoftreatmentforallshareholderswhoareinthesameposition.Sideletterscan,therefore,causedifficultiesfortheFundintermsofcomplyingwithitslistingruleobligations.TheDirectorsshouldseekadvice from the Fund’s listing sponsor if in doubt.

If the Fund is listed on a stock exchange

�� AIMA’s OAFD Guide 2008

Role of the Board

WhereaFund’sInvestmentManagerisregulatedbytheFSAintheUK,theFSAhasclarifieditsapproachto the use and disclosure of side letters by the Investment Manager.

FSA regulated Investment Managers

Insummary,theInvestmentManagerwillberequiredtodisclosetheexistenceofasideletterwhichcontains“material terms”,and thenatureof such terms,where the InvestmentManager isparty tothesideletterorisawarethattheFund,ofwhichtheInvestmentManageroranaffiliatedentityistheInvestment Manager, is a party to it.

Forthispurpose,amaterialtermcanbedefinedas:

“Anytermtheeffectofwhichmightreasonablybeexpectedtobetoprovidean investorwithmorefavourable 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”,theFSAhasrevieweditandconfirmedthatitwilltake it into account when exercising its regulatory functions. A copy of AIMA’s Guidance Note is contained in AppendixF.

This depends on the issuewhich is covered by the side letter – some issueswill require the Fund’sDirectors to sign (e.g., capacity undertakings or more favourable redemption terms) and others may be signedonlybytheInvestmentManager(e.g.,feerebatesand,subjecttothetermsoftheIMA,additionalportfolio information).

Signatories to the side letter

Generallyspeaking,aseparateshareclasswillberequiredunlesseithertheprospectusalreadyprovidesflexibilitytogranttherelevantspecialrightsortherightisonewhichcanproperlybegrantedbytheInvestmentManager(e.g.,arebateoffeesbytheInvestmentManageror,subjecttothetermsoftheIMA,the provision of additional portfolio information).

Requirement for a new share class

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 sharesmay be permitted to invest ondifferentand/ormorefavourabletermsandconditionsinorderfortheDirectorstofulfiltheirDirectors’dutiesandtheInvestmentManagertofulfilitscommonlawfiduciaryduties.

Must disclosure be made to the other existing investors?

��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.TheDirectorsshouldalsoreviewsuchdocumentswhenevermaterialchangesorrevisions are made.

6.10 Approvalofprospectusandconstitutionaldocuments

It is normal practice for Funds to reserve the right for the Board of Directors to exercise a discretionary waiver,onrequestbyaninvestor,overcertaintermsandconditionsrelatingtosubscriptionorredemption. 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:

6.11 Exercisingdiscretionarywaivers

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; andwaiver of the application of the “gate” (i.e., the power to defer excess redemption requests ifredemptions on any one dealing date exceed a stated maximum threshold).

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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 thatawaiveronanyparticulardealingdateisappliedequitablyacrossallsubscribingorredeeminginvestorswho are affected. The Directors should take into account whether the Fund’s prospectus requires therelevant 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.


Role of the Board

In addition to the legal advisers appointed to the Fund, who will provide advice to the Directors on issues oflawinrelevantjurisdictions,theBoardmaywishtoreceiveindependentguidancefromtimetotimeona 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 provideguidanceonwhatispermissiblealthoughtherearerarelyquantitativelimitsonwhatconstitutesareasonable 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.

6.13 UseofexpertsandadvisersbytheBoardandthecostsofdoingso

Fund Boards should decide how executive authority is to be exercised in between Board meetings because it isunrealistictoexpectallgovernancedecisionstobemadeonlyatthephysicalquarterlyBoardmeetings.

Several options are possible:

6.12 GovernanceinbetweenformalBoardmeetings

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).

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Whereas Directors can delegate decision-making to other bodies, they cannot avoid responsibility for the decisionsoractionstherebyarising. TheDirectorsshoulddefineinadvancethosemoreroutine itemsofbusiness that can be delegated to a sub-committee or a service provider. Any decisions made by a delegated bodyshouldbereportedtotheBoardinwritingatthenextregularmeetingsothattheycanberatified.


Directors’ and officers’ liability insurance

7. DIRECTORS’ANDOFFICERS’LIABILITYINSURANCE

Directors’andOfficers’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,whichshouldbemoreakintoanegotiatedcommercialcontractthana“take itor leave it,offtheshelf” insuranceproduct.DifferentD&Opoliciessharethesamestructurebutcanalsovaryastothedetailofspecificprovisions,sometimesdramatically.

D&Opoliciesstate,inavarietyofdifferentways,thattheinsurersshallpayonbehalfoftheDirectorslossthat the Directors incur from claims made against them, which arise from their wrongful acts committed in their capacity as Directors of the Fund.

DirectorsareofteninadifficultpositionwithregardtoinsistingonFund-specificD&Oinsurancebeingputinplace.ItmaybethatthesponsorsaysthatthecoverissuperfluoussincetheFundDirectorwillbecoveredbya 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 theFund,thenitislikelythatthegrouppolicywillhavebeenplacedinthesponsor’sjurisdiction.Thisraisesthepotentialdifficulty,intheeventofadispute,oftheDirectorcollectingpaymentofhisclaimfromtheinsurerinaforeignjurisdiction.AsimilarproblemmayoccurwithindemnityagreementsgiventoDirectorsby overseas entities.

When considering their options for D&O insurance, the Directors are not only protecting their personalliability; theyarealsoprotecting investors’assets. Intheeventofthenon-performanceofaD&Opolicyfollowing a claim, the investors will suffer because the Fund’s assets will need to be used to indemnify the Directors.

7.1 Generalguidance

NOTE: This section should not be viewed or considered as detailed commentary, which would require legal advice.



7.2 Howtoobtaincover

Specialist advice

AD&Opolicyisahighlytechnicallegaldocument,usuallywrittenbyaspecialistteamofinsurancelawyersemployed by the insurance company. If the policy is poorly negotiated on behalf of a Fund’s Directors, then the outcomeof any claimmaybeextremely detrimental to theDirectors and the Fund andbenefit theinsurance company instead.

There isnosubstitute forgoodadvice;Funds shouldemployan insurancebrokerwhospecialises inD&Oinsurance and who is also a specialist in the investment sector. It is important that the broker undertakes a processofduediligenceontheFund,tounderstandfullytheinsuranceriskprofileoftheFund,asthebrokerwill be making representations about the risk to insurance companies.

Followingtheduediligenceexercise,abrokershouldbeablefairlyquicklytoprovideanumberofdifferentproposals for D&O cover and be able to demonstrate clearly the differences between the various D&Oproducts on offer.

IfDirectorsaskthirdpartyserviceproviders,suchasadministrators,toarrangetheD&Ocoverthenitmakessense for them toensure that thedecision onwhichD&Ooptions shouldbe submitted to theboard forapprovalisbasedonqualitativeadvice.

FundDirectors should also consider employing a specialist insurance lawyer to review theD&Oproductsontheirbehalf.Thoughtneedstobegiven,notjusttohowtheD&OpolicywillrespondtoclaimsinthejurisdictioninwhichtheFundisdomiciled,butalsoastohowitmayrespondinotherkeyjurisdictions.

Proposal form for D&O insurance

FundDirectors(or,normally,oneDirectoronbehalfofallotherDirectors)willberequiredbytheinsurersto complete a signed and dated proposal form (in the US, known as an application form). This form usually containsanumberofdetailedquestionsandadeclarationattheendastothetruthofthestatementsmadein the proposal form.

TheD&OpolicyusuallydeemstheproposalformincorporatedintheD&Opolicyand,therefore,formingthebasis 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.

DifferentD&Opolicieswill definedifferentlywhat constitutes theproposalmade to the insurers by theFund - 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.

Definingwhatdoesanddoesnotconstitutetheproposalfortheinsurancecanbekeytoavoidingadispute.Ideally, the insurer would like to see audited accounts, the latest investor report, the Fund due diligence documentandaprofileoftheinvestorbase.Providingadetailedriskprofiletotheinsurershouldhelpthemunderstand the risks better and provide better terms.



The scopeof the applicable indemnificationprovisionswill differ in various jurisdictions and is normallyoutlined in the Fund’s articles of association and/or the Fund’s prospectus. Irrespective of what the Fund documentationsays,thekeytowhetherDirectorscanbeindemnifiedfortheirloss,onacontemporaneousbasis 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)imposedbytheinsurer,theD&Opolicywill,effectively,actasareplacementforanyindemnitytheDirectorsmaybeallowed from the Fund.

MostD&Opoliciesprovidebroadlysimilarcoverwithintheirinsuringclauses.Themaininsuringclausesarenormallyintwoparts:thefirstpartcoversthepersonalliabilityoftheDirectorincurredwhilstactingasaDirector 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(normallyexceptinasituationwheretheFundisfinanciallyimpaired)thattheFundhasindemnifiedtheDirectortothefullestextentpermissiblebytheapplicablelaw(called“presumptiveindemnification”byinsurers).

The reason the insurers prefer to have the claim under the second insuring clause is because there is a policy deductible(i.e.,thefirstpartofanyclaim,forwhichtheFundisliable),whereasthefirstinsuringclause,the Directors’ personal liability cover, almost always has a nil deductible.

IftheFundisunabletoindemnifytheDirectors,duetoitsfinancialimpairment,manypolicieswillagreetoindemnifytheDirectorsfrom“thegroundup”, i.e.,theinsurerswaivetheirrightstoapplythepolicydeductibletothelossoftheDirectors(eventhoughthelosswouldbeindemnifiablebytheFund),theinsurerswill normally retain their right to reclaim the amount of the deductible from the Fund.

7.3 DirectorindemnificationandD&Opolicydeductibles

7.4 Levelofcover

Cover for Fund Directors only

AstandardD&Opolicycoversnaturalpersonswhoarepast,presentandfutureDirectorsoftheFundandresponds 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,forallclaims 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 theFundhaveverydifferentviewsonthedefenceandsettlementoftheclaimandtheremaybeconflictingpositions, so that each Director may want to instruct his own legal team to conduct his personal defence. HavingmanylawfirmsandCounselworkingonthesameclaim,fordifferentDirectors,couldquicklyerodethe aggregate limit of liability.



Fund and manager group policies

ItmaybethattheDirectorsareinsuredwithinasinglejoint-policy,whichpotentiallycovers:theDirectorsandOfficersoftheFund;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); andthe 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.

Theindemnityispaidoutonafirstcome,firstservedbasis,sothatifthecoverisinadequate,somebodywillbe left without any insurance protection.

Limit of liability of the policy

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,considerationneedstobegiventopotentialdamagesandanypunitiveawardsinsettingthelimitofD&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,thelimitwillneedtobeadequatetofundthedefencecostsforacomplicateddefence,whereeachpartymightrequireitsowndefenceteam.Itispossiblethattheremayalsobelitigationinmorethanonejurisdictioninrespectofthe“same”claim.

ThequestionofdamagesandwhatmightbeasufficientlimittopaythecompensatoryorpunitivedamagespartoftheclaimismuchmoredifficultandneedstoreflecttheoverallsizeoftheFundandwhatmagnitudeof 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/benefitanalysiswhensettingtheleveloftheirD&Ocoverandwillneedtobearinmindthatinadequatelimitsofcover,orapoorlyconstructedD&Opolicy,maymeanthattheDirectorswillhavetocallonaFund’sassetsforindemnificationwheretheD&Opolicyfailstorespond.



Fund assets (US$) Limit of D&O cover (US$)0-0.5bn 5m0.5 bn to 1bn 5m to 10m1bn to 2.5bn 10m to 15m2.5bn to 5bn 15m to 30m>5bn >30m

ThepriceoftheD&Oinsuranceisimportantbutthebreadthofthecoverisvitalanditisthequalityofthecover 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.

7.5 Keyexposurestoconsider

MostD&Opoliciesprovidebroadlysimilarcoverwithintheirinsuringclauses.However,themostimportantdifferencesincoverarenormallycontainedinthepolicydefinitionsandexclusions,particularlytheadditionalexclusions endorsed onto the policy by the insurers.

7.6 Key/problematicexclusions

D&OpoliciesrespondtothelegalliabilityoftheDirectorsfor“loss”resultingfroma“claim”foraDirector’s“wrongfulact”.Thewords inquotationsarenormallydefinedtermsandall thesedefinitionsneed tobetriggered for the policy to respond in the first instance (even before any exclusions are applied by theinsurer).

“claim”shouldbebroadlydefinedsothatthepolicywillrespondtoalllikelyroutesoflitigation,includinganyinitialwrittendemand,evenifthedemanddoesnotquantifytheclaiminmonetaryterms.

“loss”defineswhattheinsurerswillpay(generally,defencecostsanddamages/settlements)andwhattheinsurerswillnotpay(generally,finesandtaxes).Careneedstobetakentocheckwhethertheinsurershaveincluded or excluded punitive damages cover, as the claim may be heard and an award made in a US court.

“wrongful act”isfairlyuniversallybroadlydefinedasanyactoromissioncommittedbytheDirectorwhilstacting 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 definethejurisdictionsinwhichitresponds?IsitfullworldwidecoverordoesitexcludetheUSorsomeUSstatutes?

Policy definitions

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:



Itisimportanttolookatexclusionsnotjustintermsoftheparticularthingthatisexcludedbythem,butalso 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:

Policy exclusions

“For”…XYZThistypeofexclusionisknownasa“forlanguageexclusion”andtheintentisthatitonlyexcludesthedirectlossfromXYZthatisspecificallyexcludedbytheexclusion.Theinsurers’statedintentisthat 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, baseduponor attributable to, or in anyway involving, directly or indirectly”…XYZ.This type of exclusion is known as an “absolute exclusion”.The preamble to the exclusion is sobroadlywrittenthatiflitigationmentionsXYZ,evenifitisnotthemainfocusoftheclaim,thentheinsurers will have the right to deny cover.

1

2

3

ThereareanumberofadditionalexclusionswhichareoftenappliedtostandardD&OpoliciesbyinsurersandtheFund’sDirectorsneedtolookatthespecificwordingoftheexclusion,inconjunctionwiththeexclusion’spreamble, to see how broadly each exclusion can be applied.

Itisimportanttolookatwhattheexclusionsactuallysay,ratherthanjustrelyonanystatedintent,andtoconsiderwhattheimpactmightbewhenconsideringthelikelytriggersoflitigationunderaD&Opolicy.

Many policies exclude claims under the following exclusions:

D&O policy exclusions

Thedepreciationorlossofinvestmentswhensuchdepreciationorlossisaresultofanyfluctuationinanyfinancial,stock,commodityorothermarketwhensuchfluctuationisoutsidetheinfluenceorcontrolof a Director.

Market fluctuation exclusion

Any stock or commodity or investment failing to perform as represented or as expected to perform.

Investment performance exclusion

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.

Money laundering exclusion



Where any shareholder owns more than 15% of the Fund.

Major shareholder exclusion (or closely held exclusion)

Claims made under the US Employee Retirement Income Security Act of 1974 .

ERISA exclusion

Claims made under the US Securities Act of 1933 or the Securities Exchange Act of 1934.

SEC exclusion

Claims made in the US or the enforcement of US court decisions in other territories.

Jurisdiction exclusion

Market abuse exclusion

Punitive damages exclusion

Regulator claims exclusion

Insolvency exclusion

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 beforeflyingoffshoreforameetingwhoseonlypurposeispresentational.

1

2

ThequestionofrestrictionswhichmaybeimposedontheBoardofaFundisadifficultoneinthecontextofdeterminingUKtaxability.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.

Restrictions on the discretion of the Board


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 taxsusceptibilityisaquestionoffactanditisnecessarytoshowineachcasethatcentralmanagementandcontrol of the Fund is genuinely exercised outside the UK.

BasicruleintheUK

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,itisnotautomaticthattaxationwillariseinthejurisdictioninwhichBoardmeetingsarenormallyheld; most obviously, the Board may not, in practice, be exercising central management and control. Two questionsinparticularwillberelevant:

Location of Board meetings

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-UKresident Directors.

The appointment of an Investment Manager or Administrator of the Fund does not contravene this principle providedthatthedutiesdelegateddonotamountto“centralmanagementandcontrol”.TheBoardmustretain 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.

Delegation of discretion

The UK tax authorities may be sceptical that Board meetings are anything more than a rubber-stamping processifamajorityofaBoardofDirectorsareUKresidentandarenotthemselvesresidentinthejurisdictionwhere Board meetings regularly take place.

If,forexample,amajorityoftheDirectorsoftheFundliveandworkintheUKbutflyouttoanoffshorelocationeverythreemonthsformeetings,itwillbedifficulttoconvincetheUKtaxauthorities,shouldtheyreview the position, that the Directors are not communicating with each other in discussing the business of theFundwhenintheUK,sothattheBoardmeetingsarepurelypresentational.ItisnotsufficientfortheBoardmerelytomeetinanoffshorejurisdiction;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.

Location of real decision making process


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 recommendedpracticestopreventsuchcircumstancesarisingapplyequallyinrespectofIrelandandIrishresident Directors of such a Fund as they do to the UK and UK resident Directors.

BasicruleinIreland

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-UScorporationwillnotbeconsideredtobeengagedinaUStradeorbusiness 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, thereisariskthatsuchcorporationwouldberequiredtofileaUSfederalincometaxreturnfortheyearinwhich such activities took place and pay tax at full US corporate income tax rates as well as an additional thirtypercent(30%)branchprofitstax.ActivitiesinwhichaninvestmentmanagerrisksthepossibilityofUS taxation include real estate investments and investments in partnerships, limited liability companies or Subchapter S corporations which operate businesses in the US.

BasicruleintheUS

Anoffshorecompanywouldbe subject toUSwithholding taxata rateof thirtypercent (30%)on itsUSsourced dividends, unless a reduced rate is applicable under a US tax treaty with the company’s country of domicile.

Dividend income

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-bearingsecuritiesmustqualifyasregisteredobligations.Further,thecorporationmustsupplyanIRSFormW-8BENoritsequivalenttothesecurityissuerwhenrequiredtodosobytheIRS.

Interest income

Under current US law, amajority of the Directors of an offshore Fund can be US residents, unless theInvestment Manager chooses to defer any portion of its management fees or incentive fees, a practice adoptedbymanyUSInvestmentManagers.IfaUSInvestmentManagerdefersitsfees,amajorityoftheDirectors of the Fund should be non-US residents, since the control of the Fund should be outside the US.

Recommended practice


Appendices


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,theSwissauthoritieswillrequirethataSupervisoryCommitteebeestablishedlocallyintheHomeJurisdiction(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; andthe Supervisory Committee must ensure compliance by the Fund with the Investment Restrictions andoverseetheimplementationofitsinvestmentobjectivesandpoliciesandreviewperiodicallyallday-to-day investment decisions taken by the Investment Manager.

●

●

Notes

Meetings of Directors appointed to such a Supervisory Committee will probably have to take place on aregularbasis(i.e.,onamonthlyorquarterlybasis),dependingontheinvestmentpolicyoftheFundand 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


Appendices

APPENDIXC-HedgeFundBoardresponsibilities (see Section 4.1)

Boar

dRo

leTo

pic

Policy?

Boar

d’s

Cont

rol

Mechanism

?DelegatedParty

Rep

ortin

gto

Boa

rd

Mon

itor

ing

adhe

renc

e to

inve

stm

ent

polic

y an

d re

stri

ctio

nsM

onit

orin

g of

Fun

d ve

rsus

inve

stm

ent

objectives

Yes/No?

Boar

d ov

ersi

ght

HFM

Qua

rter

ly r

epor

t to

Boa

rd

Mon

itor

ing

adhe

renc

e to

inv

estm

ent

polic

y an

d re

stri

ctio

nsM

onit

orin

g of

Fun

d ve

rsus

inve

stm

ent

risk

par

amet

ers

Yes/No?

Boar

d ov

ersi

ght

HFM

Qua

rter

ly r

epor

t to

Boa

rd

Mon

itor

ing

NAV

cal

cula

tion

Pric

ing

polic

y fo

r al

l Fun

d as

sets

Yes/No?

Pric

ing

polic

yAd

min

istr

ator

and

HFM

Revi

ew o

f w

ritt

en p

olic

y

Mon

itor

ing

NAV

cal

cula

tion

Mon

itor

ing

NAV

cal

cula

tion

Yes/No?

Appr

oval

of

any

exce

ptio

nsAd

min

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ator

and

HFM

By e

xcep

tion

onl

y

Mon

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ing

NAV

cal

cula

tion

Susp

end

NAV

Yes/No?

Boardresolution

req

uired

Adm

inis

trat

or a

nd H

FMQ

uart

erly

rep

ort

to B

oard

Mon

itor

ing

NAV

cal

cula

tion

Crea

tion

of

rese

rves

Yes/No?

5% li

mit

on

crea

tion

of

rese

rves

Adm

inis

trat

or a

nd H

FMQ

uart

erly

rep

ort

to B

oard

Mon

itor

ing

mar

keti

ng a

nd in

vest

or r

elat

ions

Asse

ss s

hare

hold

er s

uita

bilit

yYes/No?

Defi

nition

sofelig

iblein

vestors

Adm

inis

trat

or a

nd H

FMQ

uart

erly

rep

ort

to B

oard

Mon

itor

ing

mar

keti

ng a

nd in

vest

or r

elat

ions

Appl

icat

ion

of t

he r

edem

ptio

n ga

teYes/No?

LimitsofXX$

or$X

Xmn

Adm

inis

trat

or a

nd H

FMQ

uart

erly

rep

ort

to B

oard

Mon

itor

ing

mar

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ng a

nd in

vest

or r

elat

ions

Com

puls

ory

rede

mpt

ion

Yes/No?

Defi

nition

sofelig

iblein

vestors

Adm

inis

trat

or a

nd H

FMQ

uart

erly

rep

ort

to B

oard

Mon

itor

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mar

keti

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vest

or r

elat

ions

Susp

end

rede

mpt

ions

Yes/No?

Perm

issi

ble

circ

umst

ance

s lis

ted

Adm

inis

trat

or a

nd H

FMN

one

curr

entl

y

Mon

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ng a

nd in

vest

or r

elat

ions

Susp

end

paym

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of r

edem

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dsYes/No?

AML

rest

rict

ions

Adm

inis

trat

or a

nd H

FMQ

uart

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to B

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Mon

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elat

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Shar

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ansf

ers

Yes/No?

Defi

nition

sofelig

iblein

vestors

Adm

inis

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nd H

FMQ

uart

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rep

ort

to B

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Mon

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Refu

sal o

f a

subs

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Yes/No?

Defi

nition

sofelig

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vestors

Adm

inis

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nd H

FMQ

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ort

to B

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Anti

-mon

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Ove

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f AM

L ar

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tsYes/No?

AML

polic

ies

of A

dmin

istr

ator

and

HFM

Adm

inis

trat

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nd H

FMQ

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erly

rep

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to B

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Revi

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poin

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f se

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ovid

ers

Mon

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per

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of

each

ser

vice

pr

ovid

erYes/No?

Key

Perf

orm

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Indi

cato

rsH

FMQ

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erly

rep

ort

to B

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Revi

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f ap

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d pe

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f se

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e pr

ovid

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Appo

intm

ent

of a

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ors

Yes/No?

Lett

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f En

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men

tH

FMAn

nual

aud

it r

evie

w

Com

plia

nce

wit

h lis

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rul

es a

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nuin

g ob

ligat

ions

Appr

oval

of

the

Fund

’s a

ccou

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and

the

audi

t pr

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sYes/No?

Annu

al a

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rev

iew

Audi

t su

b-co

mm

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eAn

nual

aud

it r

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w

Side

lett

ers

Side

lett

ers

Yes/No?

Log

of s

ide

lett

ers

HFM

Qua

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ly r

evie

w o

f lo

g

Appr

oval

of

pros

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us a

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onst

itut

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tsM

aint

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f Fu

nd d

ocum

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tion

Yes/No?

Chan

ges

adop

ted

by r

esol

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nH

FMAsreq

uired

Exer

cisi

ng d

iscr

etio

nary

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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 Directorshavesufficienttimetoreviewtheauditandaccounts.ConfirmwiththeauditorsiftheywillbeaskedtomakeaformalpresentationtotheBoardontheaudit 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.,newUSGAAPrequirementunderFIN48forassessmentofalltaxpositionstaken).Confirmandobserveanyapplicabledeadlinestobemet–e.g.,pursuanttotheprospectusandunderthe Irish Stock Exchange listing rules (if applicable).Agree the format of the accounts, particularly where there are any new audit standards or a new auditfirmorofficeisinvolved.ConsideranyapplicableIrishStockExchangecontentrequirements(andresponsibilityforcheckingcompliance) and inclusion of the Directors or Investment Managers’ report (these may not automatically be covered by the auditors).Ensurethatthefinalauditedaccountsaresenttoall localregulatorsand/orstockexchanges,asrequiredandallotherregulations(e.g.,consentletters,etc.)arecompliedwith.Remember Commodity Pool Operator statement and deadlines if the Investment Manager is CFTC registered.ForaCaymanincorporatedFund,ensurethattheCaymanofficeoftheauditorsisinvolvedearlysotheydonotmakesignificantchangeslater.Establish the auditors’ letter of engagement (L/E), including any updates. Be aware of the different limitationsofliabilitybetweendifferentofficesoftheFund’sauditorsandbetweendifferentauditfirms.Establish the form and content of any Directors’ letter of representation (L/R) required by theauditors 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(theyfrequentlycontainmorethanaccountingprinciples 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/oremailformatforaccountstobecirculatedtoregisteredholdersandunderlying investors. Where electronic copies are issued, there are usually certain terms, outlined in the auditor’s L/E, to be adhered to.ObtainandfileelectronicallysignedPDFaccountsasthisisoftenrequiredforinvestorduediligencerequests(e.g.,Caymane-filingrequirement).

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Appendices

APPENDIXE-Typicalcontinuingobligationsimposedbylistingrules (see Section 6.8)

The overriding obligation imposed is that the information necessary to enable the public and shareholders to evaluatethefinancialpositionoftheFundandtoavoidthecreationofafalsemarketintheFund’ssharesmust be made public knowledge without delay.

Thismeansthattherelevantstockexchangewillrequirethatanannouncementbemadeofsuchinformationas 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.

Disclosureobligation

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.

Routineannouncements

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.

Notificationofinterestsinshares

Where the Fund’s shares carry voting rights, a Fund may be obliged to notify the stock exchange of the holdingsofcertaincontrollingshareholders.Forexample,theIrishStockExchangerequiresnotificationofthe holdings of:

Controllingshareholders

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; oranypersonwhoisabletocontroltheappointmentofDirectorswhoareabletoexerciseamajorityof the votes at the Board meetings of the Fund.

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The Fund may also be required to adopt rules prohibiting certain persons (e.g., the Directors and theInvestment Manager) from dealing in the Fund’s shares at any time when they are in possession of price sensitive information.

Restrictionsondealingsinshares


Appendices

ThestockexchangewilltypicallyrequiretheFundtoprepareanannualreportincludingfullauditedfinancialstatementsandasemi-annualinterimreportincludingunauditedfinancialstatements.Theannualandinterimreportsmustbesenttoshareholderswithinacertaintimeperiodoftheendofthefinancialyearandmustbereceived 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.

Financialreports

Under the rules of the relevant stock exchange, certain issues must be voted on by the shareholders before aFundmaytakeanyaction.Forexample,therulesoftheIrishStockExchangerequireashareholdervotein respect of:

Issuesrequiringthepriorapprovalofshareholders

anyproposedmaterialchangeintheinvestmentpolicyand/orobjectiveoftheFund(onlyifthechange 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; orany proposal to issue shares at less than the net asset value per share, where those shares are not offeredfirstonapro-ratabasistoexistingshareholders.

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Inexceptionalcircumstances,theIrishStockExchangereservestherighttorequirepriorshareholderapprovalof any proposal which may result in a substantial change in the nature and substance of a Fund.

Iftheapprovalofshareholdersisrequiredonanymatter,aFundmustsendacirculartoshareholders.Thecircular 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).

Circulars


Appendices

APPENDIXF-AIMA’sIndustryGuidanceonSideLetters

Following discussions with the UK’s FSA as to clarification of various issues arising out of its FeedbackStatement 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).

Thedecisionwhether to follow this IndustryGuidance is for thefirms concerned.However, the FSA hasrevieweditandconfirmedthatitwilltakeitintoaccountwhenexercisingitsregulatoryfunctions,althoughthis cannot affect the rights of third parties.

ThisisnotFSAGuidanceand,intheeventofanyconflict,theFSAHandbookprevails.

Introductionandstatus

Insummary,firmswillberequiredtodisclosetheexistenceofsideletterswhichcontain“materialterms”,andthenatureofsuchterms,wherethefirmisapartytothesidelettersorisawarethataFundofwhichthefirmoranaffiliatedentityistheInvestmentManagerisapartytothem.Firmswillnotberequiredtodisclose the existence of side letters which contain no material terms.

Disclosurerequirement

Amaterialtermcanbedefinedas:

“Anytermtheeffectofwhichmightreasonablybeexpectedtobetoprovideaninvestorwithmorefavourabletreatment 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-materialtermswouldincludefeerebatesand“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 noticeperiod inrespectofallother investors inthesameshareclass, thetermwouldbe“cured”of itsmateriality.

Whatisamaterialterm?

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,issignificant(i.e.,inexcessof10%),firmsshouldconsiderhighlightingthis fact.

Natureofdisclosure

SUPPLEMENT NO. 1 TO AIMA’S INDUSTRY GUIDANCE NOTE ON SIDE LETTERS


Appendices

Initially,firmswillbeexpected tomakedisclosureby31stOctober2006ofallmaterial termscontainedin 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,firmswillbeexpected tokeep thisdisclosure reasonablyup-to-dateand tomake reasonablytimely disclosure where a side letter is entered into which contains a material term of a category not includedinthefirm’spreviousdisclosures.

Timingofdisclosure

Firms should make disclosure of relevant side letters both to existing and to prospective investors.

Inthecaseofexistinginvestors,inparticular,firmswillneedtoconsidertowhomitisappropriatetomakethe disclosure (for example, the registered holder or, where relevant, the holder’s authorised representative such as its Investment Manager).

Towhommustdisclosurebemade?

Firmsareatlibertytoselectthemethodbywhichtheymakedisclosure.Itisanticipatedthatmanyfirmswillchoosetodosointheirmonthly,quarterlyorhalf-yearlyinvestorreports/newsletters.

Methodofdisclosure

Since the publication of AIMA’s Industry Guidance on 27 September 2006 members of AIMA and others have raisedcertainissuesrelatingtotheinterpretationofthesideletterdisclosurerequirement.AIMAhasdiscussedthese issues with the FSA and is now publishing this Supplement to the Industry Guidance.

ThedecisionwhethertofollowthisSupplementtotheIndustryGuidanceisforthefirmsconcerned.

This is not FSA Guidance.

Introductionandstatus

Therequirementtodisclosetheexistenceofsideletterswhichcontainmaterialtermsandthenatureofthoseterms(the“disclosurerequirement”)appliesonlytoafirmwhichisboth(1)anFSAregulateddiscretionaryinvestmentmanagerwhichemployshedgefundtechniquesand(2)anauthoritativesourceofinformationforfundinvestorsontheinvestmentstrategy,riskprofileandrelatedmattersaffectingtherelevantfund(“anauthoritativesourceofinformation”).Adiscretionaryinvestmentmanagerwillberegardedasanauthoritativesource 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 suchinformation 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.

Disclosurerequirement


Appendices

Thedisclosurerequirementdoesnotapply(a)tofirmswhichonly(1)marketsharesorinterestsinafundand/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)tofirmswhicharefundofhedgefundmanagers.

Thedisclosure requirement does not apply to a firmwhich is a party to a side letter, but is not itselfan authoritative source of information, in circumstanceswhere an affiliated investmentmanager is anauthoritative source of information (for example, this would cover the situation where a US or other non- UK affiliateofthefirmistheauthoritativesourceofinformation).

Thereremainanumberof“greyareas”inrelationtotheapplicationofthedisclosurerequirementincertainsituations.Thesesituationsinclude(1)whereafirm(a)isnotapartytocertainsidelettersbutisawarethatafundofwhichanaffiliatedentityistheInvestmentManagerisapartytothem,(b)isanauthoritativesource of information but (c) has no or limited contact with investors and prospective investors because all or mostofsuchcontactistheresponsibilityofanon-UKaffiliatedmanager(suchasaUSaffiliatedmanager)and(2)whereafirmhasresponsibilityforgeneratingonlypartofsuchinformationinconjunctionwithanon-UKaffiliatedmanagerwhichalsogeneratespartthereof.

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 thatuntilthen itwillnot insistoncompliancewiththedisclosurerequirement inrelationtosuchareas.However,firmswhichareinanydoubtastotheneedforcompliancearerecommendedtoseekappropriateprofessional advice.

Greyareas

TheFSAhasconfirmedtoAIMAthatitwillconsiderthatcompliancewiththeinitialdisclosurerequirementby31October2006willbesatisfiedwherefirmsmakesuchdisclosureintheirinvestorreports/newsletterswhich are sent out in early November 2006.

Timingofdisclosure


Appendices

APPENDIXG-CaymanIslandsfilingandregulatoryrequirements

A fund vehicle organised under Cayman Islands law, whether in corporate, partnership or trust form, is required tobe regulatedunder theMutualFundsLaw (the“Law”) if it issuesequity interestswhichareredeemableorrepurchasableattheoptionoftheinvestor.Thereisanexemptionfromthisrequirementiftherearefifteenorfewerinvestors(ofrecord),amajorityinnumberofwhichcanappointorremovethe“operator”(theBoardofDirectors,generalpartnerortrustee,asthecasemaybe).Forthepurposesofthisnote,itisassumedthattheminimuminvestmentwillbeatleastUS$100,000orequivalent,inwhichcaseregistration is non-discretionary.

Otherthanarequirementthattheannualauditbesignedoffbyalocalfirm,theLawdoesnotmandatethatanyserviceproviderstoaCaymanIslandsdomiciledFundbelocatedinthejurisdiction.Likewisethereisnorestriction on the residence or domicile of Directors. To the extent services are provided locally, the supplier itselfwillberequiredtoholdappropriatelicences-forexample,administration,investmentmanagementoradvice,trusteeshipsandprovisionofDirectors,registeredofficeorcustodyfacilities.

Background

WhereaFundisrequiredtoregisterundertheLaw,theprincipalrequirementsareasfollows:

ObligationsofaregisteredmutualFund

filingofformMF1(and,inpractice,acopyoftheofferingdocument)alongwitharegistrationfeeof US$3,048.78;notifyinganysubsequentchangestotheparticularsdisclosedintheformMF1and,inpractice,anysupplement or revisions to the offering document; andfilingofauditedfinancialsand(forfiscalperiodsendingafter1stJanuary2007)anelectronicsummaryreport“FAR”withinsixmonthsoftheendofsuchperiod.

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The government fees payable on incorporation/registration of each fund vehicle are as follows:

Governmentfees

Exempted Company – US$573.171;Exempted Limited Partnership – US$914.63; Exempted Trust – US$609.76; andForeign Company – US$1,036.59.

� Thisistheminimumgovernmentfeeandisbasedontheauthorisedsharecapitalofacompany.TypicallyaFund willbestructuredsuchthatitfallswithinthisminimumfeeband.

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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).


Appendices

APPENDIXH-WorkingGroupmembers

StevenWhittaker Simmons&Simmons

Leadauthor

DermotButler CustomHouseAdministration&CorporateServicesLtdRobert Kelly Baronsmead Partners LLPHenryHarford Maples&CalderShelbyduPasquier Lenz&StaehelinDeborah Tanner Olympus Capital LLP Olwyn Alexander PricewaterhouseCoopers LLPMichaelTannenbaum TannenbaumHelpernSyracuse&HirschtrittLLPPaulHale Simmons&SimmonsAIMA Andrew Baker Mary Richardson

Guidecontributors

Timothy Darvall Baker Steel Capital Managers LLPTimothy Spangler Kaye Scholer LLPMicheleGibbs TannenbaumHelpernSyracuse&HirschtrittLLP

Guideworkinggroupmembers


Appendices

APPENDIXI-AboutAIMA

AIMAisthehedgefundindustry’sglobaltradeassociation.Itisnot-for-profitandhasalmost2,000corporatemembers 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.

AIMAfocusesspecificallyonhedgefunds,managedfuturesandmanagedcurrencyfundsratherthanprivateequity,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-eminentvoiceoftheindustrytothewiderfinancialcommunity,institutionalinvestors,the media, regulators, governments and other policy makers; andtoofferacentralisedsourceofinformationontheindustry’sactivitiesandinfluence,andtosecureits place in the investment management community.

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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 thespecialistfinancialmediaaroundtheworld.

Key products created and distributed by AIMA include:Guide to Sound Practices for Hedge Fund Valuation (2007)Seriesofgenericduediligencequestionnairesfortheselectionofmanagersandserviceproviders(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)

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Appendices

APPENDIXJ-AbouttheSponsors

Simmons&Simmonshavebeenadvisinghedgefundsponsorsandmanagersfromthefirstdevelopmentofthehedge fund industry in Europe. OurhedgefundpracticeisthelargestofanyUKlawfirm.ThestrengthofthepracticeisrecognisedbyLegal500,theindependentUKlegaldirectory,whichdescribesitas“theleadingfirminhedgefunds”.Ourhedgefund 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. Ourhedgefundteamincludesleadingpractitionersinthefield.IainCullen,RichardPerry,NeilSimmondsandStevenWhittakerareallrecognisedas“leadingindividuals”inLegal500and/orChambers&Partners. We act for many of the best known hedge fund sponsors and managers. Our clients include both specialist hedgefundfirmsaswellasmanyinstitutionalfundmanagementhouses. www.simmons-simmons.com

CustomHouseAdministration&CorporateServicesLtdisaspecialistalternativeinvestmentandhedgefundadministrator–indeedtheydescribethemselvesas“TheSpecialistFundSpecialist”.CustomHousecoversallaspects 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,andwhichwasthefirsthedgefundadministratortobeawardedaMoody’sMQ(ManagementQuality)Rating,havesinceJanuary2007beenabletooffera24/7servicethroughrepresentativeofficesin 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 authorisationdoesnotextendtotherepresentativeofficesinChicagoandSingapore.CustomHouse,whichoperates 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


Appendices

AbouttheSponsors

Baronsmeadisanindependent,specialistbrokerprovidingfinancialrisksinsurance,guidanceandadvicetoinvestment funds. We provide protection to the investment industry from the legal, regulatory and operational risks they face.

Ourspecialistfinancialrisksinsuranceproductsinclude:

As a dynamic business, we continue to expand our products and services in response to our clients’ requirements.

Ourclientsrangefromlongestablishedfundgroupstostartupfunds,allofwhombenefitfromourpromiseofdeliveringqualityservice.Weactfortraditionalandalternativefundsandmanagementgroups.

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’andOfficers’LiabilityInsuranceProfessional Indemnity InsuranceFund and General Partner Corporate Liability InsuranceEmployee Dishonesty and Third Party Computer Crime InsuranceERISA Fiduciary Dishonesty Bond and ERISA Fiduciary Liability Insurance Prospectus LiabilityOutside Directorship Liability InsuranceEmployment Practices Liability InsurancePension Trustee Liability Insurance

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Appendices

ALTERNATIVE INVESTMENT MANAGEMENT ASSOCIATION

Enhancing understanding,sound practicesand industry growth

The Alternative Investment Management Association2nd Floor, 167 Fleet Street, London EC4A 2EA, UKTel +44 (0)20 7822 [email protected]

www.aima.org

AIMA's Offshore Alternative Fund Directors' Guide 2nd Edition 2008

Documents

Transcript of AIMA's Offshore Alternative Fund Directors' Guide 2nd Edition 2008