Managed Funds Association’s Sound Practices for Hedge Fund Managers 2009 Edition

Sound Practices History First published in 2000 Four revisions: 2003, 2005, 2007 and 2009 New edition incorporates PWG Best Practices Report of Asset Managers’ Committee Heightened standards of excellence to restore investor trust Due diligence questionnaire provides tools for investors Hedge funds have strong role in helping to restore financial stability and economic recovery

Global Context As G-20 gathers, MFA is taking steps to restore investor confidence G-30 Report on financial system stability says: “The process, to be effective, depends on mutual trust. Trust based on confidence in the integrity of institutions and the continuity of markets.” MFA now working on unified best practices for Financial Stability Forum (FSF) due April 30, 2009

Part of MFA’s Global Efforts MFA works with IOSCO to develop global standards for portfolio valuation principles MFA works with IOSCO on task forces to prepare for G-20 MFA works with European Commission, meets frequently with European Parliament in Brussels MFA has met with G-7 Finance Ministers

Objectives of Sound Practices 1)Strengthen business practices of hedge fund industry through a strong framework of internal policies and procedures 2)Encourage individualized assessment and application of recommendations 3)Enhance market discipline in global financial marketplace to prevent systemic risk

Due Diligence Questionnaire Industry commitment to investor protection Encourages best practices in communication between funds and investors Provides more detail than offering documents DDQ in 3 main sections: Investment manager overview Overview of activities of investment manager Fund information More qualitative questions than any Seeks details on personnel, service providers, other businesses, conflicts of interest and investor communications

What’s New in 2009 Edition? Represents major overhaul Incorporates PWG Asset Managers’ Committee Best Practices Vastly comprehensive guidance on responsibilities to investors, disclosure and investor protection

Seven Major Sections 1)Disclosure and Investor Protection 2) Valuation 3) Risk Management 4) Trading and Business Operations 5) Compliance, Conflicts and Business Practices 6) Anti-Money Laundering 7) Business Continuity/Disaster Recovery

Disclosure & Investor Protection Disclosure framework: PPM, audited financials, performance, regular communication with investors Material information: Scope of fund’s operations Responsibilities to investors Conflicts of interest Participation of Investors Disclosure to counterparties

Valuation Valuation framework Valuation governance Implementation of valuation policies Valuation policies and procedures Adopt and implement written policies Identify responsible person or team Identify pricing sources Adopt accounting standards (eg GAAP, IFRS) Set-up internal documentation Establish policies for valuing hard-to-value assets Include guidelines on side pockets

Risk Management Risk is inherent and essential to returns Goal of risk management is not to eliminate risk, but to understand it and manage it prudently Overall approach should include risk profiles for each fund and appointment of Chief Risk Officer Periodic review of risk measurement, monitoring and management procedures Identify categories of risk: Liquidity risk Leverage risk Market risk Counterparty credit risk Operational risk Legal and compliance risk

Trading and Business Operations Develop integrated framework to manage trading and operations Conduct due diligence on counterparties Develop cash management and collateral management framework Select and monitor reputable key service providers Develop core infrastructure and operational practices Include practices for OTC derivatives and complex products Develop and monitor systems for core accounting practices Develop and monitor information technology practices Seek best execution in trading activities

Compliance, Conflicts, Business Practices Establish culture of compliance Adopt written Code of Ethics Develop written compliance manual Train and educate personnel about compliance Dedicate resources to compliance and appoint Chief Compliance Officer

Anti-Money Laundering MFA’s pioneering AML Guidance first published in March 2002, following enactment of PATRIOT Act Although Treasury has not issued rules, hedge funds should adopt and implement AML programs MFA’s AML Guidance update in 2007 Guidance now inside Sound Practices (no longer appendix)

Business Continuity/Disaster Recovery Establish plan objectives to provide for continuation of essential operations in event of natural disaster, market disruption, terrorist attack, loss of key person or business emergency Detail mission-critical systems Identify personnel to achieve objectives Replicate technology systems Train and test at least annually An oversight person or team should be responsible for regulatory reporting and compliance Create business continuity, contingency and succession plans Plan for crisis management and disaster recovery Understand and use government resources as necessary

Managed Funds Association’s Sound Practices for Hedge Fund Managers 2009 Edition