BEST PRACTICES

FOR THE

HEDGE FUND INDUSTRY

~~~~~

REPORT
OF THE

ASSET MANAGERS’ COMMITTEE

TO THE PRESIDENT’S WORKING GROUP

ON FINANCIAL MARKETS

April 15, 2008

 * * *

THE ASSET MANAGERS’ COMMITTEE

Eric Mindich, Chair (Eton Park Capital Management)
Anne Casscells (Aetos Capital, LLC)
Marc Lasry (Avenue Capital Group)
William Von Mueffling (Cantillon Capital Management)
Anne Dinning (D. E. Shaw & Co., L.P.)
Jonathon S. Jacobson (Highfields Capital Management)
James S. Chanos (Kynikos Associates LP)
Daniel S. Och (Och-Ziff Capital Management)
Daniel H. Stern (Reservoir Capital Group)
Edward Mulé (Silver Point Capital)

COUNSEL TO THE ASSET MANAGERS’ COMMITTEE

Sullivan & Cromwell LLP
Schulte Roth & Zabel LLP

* * *

NY12532:415310.9
 Table of Contents

EXECUTIVE SUMMARY ............................................................................................... i

BEST PRACTICES ...........................................................................................................1
Disclosure and Investor Protection ..................................................................................1
I. Disclosure of Material Information to Investors ...................................................1
II. Ongoing Information Provided to Investors..........................................................5
III. Side Letters and Parallel Managed Accounts......................................................10
A. Side Letters....................................................................................................10
B. Parallel Managed Accounts...........................................................................10
IV. Participation of Investors ....................................................................................11
V. Disclosure to Counterparties ...............................................................................12
Valuation...........................................................................................................................14
I. The Valuation Committee ...................................................................................14
II. Personnel Responsible for Implementing the Valuation Policies .......................16
III. Valuation Policies and Procedures......................................................................17
A. Baseline Elements of the Valuation Policy ...................................................17
B. Investment Positions with No Readily Ascertainable Market Value............19
C. Side Pockets and Other Similar Arrangements .............................................20
Risk Management ............................................................................................................22
I. The Manager’s Approach to Risk Management .................................................22
A. Identification and Design ..............................................................................22
B. Measurement, Monitoring and Management ................................................23
C. Personnel .......................................................................................................24
II. Categories of Risk ...............................................................................................25
A. Liquidity Risk................................................................................................25
B. Leverage Risk................................................................................................26
C. Market Risk ...................................................................................................27
D. Counterparty Credit Risk ..............................................................................30
E. Operational Risk............................................................................................31
Trading and Business Operations ..................................................................................33
I. Counterparties .....................................................................................................33
A. Selection of Counterparties ...........................................................................33

i
 Table of Contents
(continued)

B. Relationships with Counterparties ................................................................34

II. Cash, Margin and Collateral Management..........................................................35
III. Selection of Key Service Providers.....................................................................35
IV. Core Infrastructure and Operational Practices ....................................................36
A. Operational Procedures .................................................................................36
V. Additional Infrastructure and Operational Practices...........................................37
A. OTC Derivative Practices..............................................................................37
B. Practices for Other Complex Products ..........................................................38
C. Staffing and Resources..................................................................................39
VI. Core Accounting Processes.................................................................................39
VII. Disaster Recovery/Business Continuity ..............................................................40
Compliance, Conflicts and Business Practices ..............................................................42
I. Culture of Compliance ........................................................................................42
II. Code of Ethics .....................................................................................................43
III. Compliance Manual ............................................................................................44
A. General Elements of the Compliance Manual...............................................44
B. Recordkeeping...............................................................................................47
C. Conflicts of Interest.......................................................................................47
D. Training and Educating Manager’s Personnel ..............................................49
IV. Compliance Function ..........................................................................................50
A. Chief Compliance Officer .............................................................................50
B. Discipline and Sanctions ...............................................................................50
C. Annual Compliance Review..........................................................................51

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 EXECUTIVE SUMMARY

The Asset Managers’ Committee (“AMC”) issues this comprehensive Report that
sets a new standard of best practices to answer the call of the President’s Working Group
on Financial Markets (“PWG”) to reduce systemic risk and foster investor protection.
The AMC, which comprises institutional alternative asset managers representing diverse
strategies and perspectives, was formed as a private sector committee by the PWG in
September 2007.1 Its first task was to develop guidelines that define best practices for the
hedge fund industry.

This call to develop best practices comes at an important time in the hedge fund
industry.2 Over the past three decades, the hedge fund industry has evolved from a niche
business consisting primarily of single-strategy, single-geography firms serving high net
worth individuals into an important participant in global markets, consisting primarily of
global multi-strategy firms serving a wide variety of institutional investors. The industry
has grown to 8,000 firms and $2 trillion in assets under management and has become an
increasingly important participant in the financial markets.

With this growth comes increased responsibility. This Report represents our
acceptance of this responsibility by promoting strong practices that are commensurate
with the increasingly important role of hedge funds in the financial markets. The AMC
Report:

o Calls on hedge funds to adopt comprehensive best practices in all aspects of their
business including the critical areas of disclosure, valuation of assets, risk
management, business operations, and compliance and conflicts of interest;

1
PWG Announces Private Sector Groups to Address Market Issues for Private Pools of
Capital, September 25, 2007, available at http://www.ustreas.gov/press/releases/hp575.htm
(last accessed on February 29, 2008).
2
By “hedge fund” we mean a pooled investment vehicle that generally meets most, if not all,
of the following criteria: (i) it is not marketed to the general public (i.e., it is privately
offered), (ii) its investors are limited to high net worth individuals and institutions, (iii) it is
not registered as an investment company under relevant laws (e.g., U.S. Investment Company
Act of 1940), (iv) its assets are managed by a professional investment management firm that
is compensated in part based upon investment performance of the vehicle; (v) its primary
investment objective is investing in a liquid portfolio of securities and other investment
assets; and (vi) it has periodic but restricted or limited investor redemption rights. (This
description is based in part on the definition in the Managed Funds Association’s 2007 Sound
Practices for Hedge Fund Managers.) Although hedge funds may invest in private equity
and real estate, this Report is not addressed to the specific considerations of private equity or
real estate funds. We use the terms “alternative asset manager” and “manager” to refer to the
entity that establishes the investment profile and strategies for the hedge fund and makes the
investment decisions on its behalf.

i
 o Recommends innovative and far-reaching practices that exceed existing industry-
wide standards; and

o Increases accountability for hedge fund Managers. This is the first time a best
practices Report is being released together with a separate Investors’ Report. This
will promote accountability, and together these Reports will result in better
managed hedge funds and better educated investors.

This Report is being released at a time when the financial markets are
experiencing significant stress. These events underscore the need for hedge funds, along
with other market participants, to evaluate and implement strong practices to manage
their businesses. It is clear that substantial discussion and debate by policymakers on
how to address these challenges is underway. No set of best practices can provide
solutions to the complex issues facing the financial industry today. However, we believe
that regardless of the results of that debate, the promotion of robust industry practices,
such as those set forth in the Report, will be critical to and consistent with the goal of
reducing systemic risk.

As hedge funds have grown, they have increasingly served as an important source
of capital and liquidity in world markets, by providing financing to new companies,
industries and markets, as well as by committing capital in times of both market stress
and market stability. Hedge funds help provide efficiencies in pricing of securities and
other financial assets throughout the markets as a result of their extensive research and
willingness to make investments in all market conditions. In their role as counterparties
to those who wish to hedge their risks, hedge funds often serve to disperse risk and lower
volatility in the markets.

As hedge funds have evolved and become more integral to an increasingly global
and complex financial world, there is greater need for them to develop and maintain
robust infrastructure, controls and business practices. Moreover, as sophisticated
institutional investors have committed more of their portfolios to alternative investments,
they have demanded that hedge funds demonstrate appropriate infrastructure and controls
in managing their activities.

An Investors’ Committee (“IC”), which the PWG formed concurrently with the
AMC, is also releasing a best practices Report for investors to help them assess hedge
fund investments. The IC Report and the AMC Report acknowledge that both investors
and hedge fund managers are accountable and must implement appropriate practices to
maintain strong controls and infrastructure in support of their activities. This is the first
time that investors and managers have come together to achieve that goal. We worked
closely with the IC and applaud their effort to provide guidance to investors considering
hedge fund investments. We believe that hedge fund managers should use the IC Report
as a guideline for their interaction with investors. We believe that together these Reports
will result in better managed hedge funds and better educated investors.

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 The IC recommends in its best practices that investors use the AMC best practices
as a guideline in conducting due diligence reviews of hedge funds. The investor
community will be a strong partner in ensuring that hedge fund managers adopt suitably
strong and appropriate practices to support their businesses.

We believe this Report raises the bar for the industry by providing strong and
clear guidance to managers for strengthening their practices in ways that investors
demand and the markets require, while also providing managers with appropriate
flexibility to continue to innovate and grow. By adopting these practices, hedge funds
will strengthen infrastructure and risk management practices that can help them more
effectively manage market events or financial crises that may arise.

We have designed this Report to raise the standards for all managers, even the
largest and most sophisticated. Our mandate was to develop best practices to address
systemic risk and foster investor protection, and it is these large firms whose capital
collectively has the largest impact on the market. We recognize that not all of the
practices in this Report will be applicable to all managers at all times. However, our goal
is to provide managers of all sizes with standards that they can adopt to support and
strengthen their businesses and operations.

We sought to identify and address the key areas where best practices would most
effectively promote investor protection and reduce systemic risk. These areas are:

o Disclosure: Strong disclosure practices that provide investors with the

information they need to determine whether to invest in a fund, to monitor an
investment, and to make a decision whether to redeem their investment;

o Valuation: Robust valuation procedures that call for a segregation of

responsibilities, thorough written policies, oversight and other measures for the
valuation of assets, including a specific focus on hard-to-value assets;

o Risk management: Comprehensive risk management that emphasizes measuring,

monitoring and managing risk, including stress testing of portfolios for market
and liquidity risk management;

o Trading and business operations: Sound and controlled operations and

infrastructure, supported by adequate resources and checks and balances in
operations, to enable a manager to achieve best industry practice in all of the other
areas.

o Compliance, conflicts, and business practices: Specific practices to address

conflicts of interest and promote the highest standards of professionalism and a
culture of compliance.

Our intention is for managers to carefully assess their specific practices against
the practices in this Report and adopt the best practices applicable to their business. What

iii
is critical is that managers are able to explain to investors how they have implemented
and adopted the practices in this Report.

Summary of AMC Report

Frameworks: A Comprehensive Approach to Best Practices

This Report establishes a framework for each of the five key areas mentioned
above – disclosure, valuation, risk management, trading and business operations, and
compliance, conflicts and business practices – to help hedge fund managers take a
comprehensive approach to adopting best practices and serve as the foundation upon
which those best practices are established. To implement the frameworks, hedge funds
need to assess their business as a whole. The frameworks, while tailored to each area,
establish a consistent and strong approach that: 1) states the goal and essential elements
of the framework; 2) outlines clear and consistently applied policies and procedures that
provide a structure to help ensure better educated investors and better managed hedge
funds implement the framework; 3) incorporates a regular process for reviewing and
updating the framework; and 4) requires adequate resources and knowledgeable
personnel to support the framework.

Within each framework, we set forth best practices for its implementation. We
intend for managers to carefully assess their specific practices against the practices set
forth in this Report. We have provided specific examples of types of best practices to
guide managers as they conduct this assessment. For example, a long-short manager
investing in exchange-traded securities over long time horizons likely requires a simpler
valuation policy, that does not necessarily contain all of the practices set forth in this
Report, than the policy of a manager trading complex OTC derivatives. Similarly, a
manager trading equity securities globally in extremely high volumes needs more robust
operating systems and a higher degree of automation than a manager that invests in a
concentrated portfolio of U.S. equities.

The manner in which each manager implements the best practices will by
necessity differ in light of each manager’s size, strategies, products and other salient
characteristics of its business. While we fully expect that smaller managers will be
unable to adopt all of the practices in this Report, especially at inception, we believe this
Report will provide helpful guidance and direction as they build and develop their
businesses.

A summary of our approach to the five key areas follows.

(i) Disclosure

This Report sets forth the basic elements of disclosure that managers should make
available to all investors. Investors need material information to assess whether to invest
in a fund or redeem an investment, as well as to monitor their exposure to their ongoing
investment. The kinds of information managers disclose will vary depending on the

iv
strategies and structure of the fund. Looking beyond our own industry, we took note of
the various ways in which public companies disclose information. Public companies in
the United States are required to provide regular and ongoing information. Each year,
they provide a comprehensive summary of their performance, including audited financial
statements and extensive qualitative information. They also must publish quarterly
reports, as well as updates upon the occurrence of significant events. In addition,
investor relations departments respond to questions and provide a constant flow of
information to investors.

In developing best practices that will provide hedge fund investors with
information that they need to make and monitor their investments, we drew from key
elements of the public company disclosure regime, which provides investors with
material information at the time of making their investment and updates throughout the
life of the investment. We sought to take the core principles of this regime and adapt
them to the hedge fund industry.

The disclosure framework addresses the information that managers will disclose
to investors to provide them with information to allow them to make an investment
decision and to monitor it over time. This includes the provision of a private placement
memorandum, annual audited financial statements, periodic performance information and
other investor communications, as well as timely disclosure of significant events in light
of the circumstances. Managers should determine (based on the specific characteristics
of their business) the manner and frequency with which these disclosures will be made
and clearly communicate this to investors. Public companies produce independently
audited, GAAP-compliant financial statements. Because hedge fund investors share the
need for accurate, independently verified financial information, we recommend that all
hedge funds do (or continue to do) the same.

Managers should provide periodic performance information to investors and

provide an investor letter or similar communication and risk report on at least a quarterly
basis. We also recommend that managers provide qualitative discussion of performance
information (in addition to quantitative data) to provide investors with a better
understanding of the performance of the fund. This discussion is intended to provide
context to the manager’s performance and can be in any form or style the manager feels
is most useful (e.g., as part of its investor letter or other disclosure). The nature of this
discussion will vary depending on the nature of the strategies and business of the
manager. It should also take into account the need to protect the confidentiality of the
fund’s positions and strategies.

In addition to disclosure to investors, we recommend that a manager’s disclosure

framework address its disclosure to counterparties, such as banks and broker-dealers.
Hedge funds and counterparties should agree, at the time they initiate their relationship,
on the types of information that will be made available. Information provided should be
appropriate to the type of relationship between the fund and the counterparty, and be

v
subject to appropriate protection of confidentiality. We believe this will help promote
stable relationships with counterparties that will serve to mitigate systemic risk.

(ii) Valuation

This Report recommends that managers adopt a valuation framework that

provides for consistent and documented policies and appropriate controls for segregation
of responsibilities between portfolio managers and those responsible for valuations.
Valuation of investments is of critical importance to investors in any investment vehicle,
and in hedge fund context there are additional considerations. First, many funds invest in
a wide range of types of assets, some of which do not have readily available market
prices. Secondly, the funds are structured so that valuation has a direct impact on the
compensation received by the manager.

An essential characteristic of hedge funds is the incentive fee (or allocation)

arrangements pursuant to which the manager participates with investors in the fund’s
performance. This arrangement aligns the interests of managers and their investors and
facilitates the ability of the industry to attract and retain top investing talent. However, it
also creates the potential for conflicts of interest between a manager and the fund that
need to be addressed and mitigated.

Not all fund investments raise the same degree of valuation issues. For exchange-
traded securities, market price information is generally widely available and valuations
are readily and independently verifiable. However, as a fund makes investments that are
less liquid – where the market for the investment is limited or non-existent – fund
valuations become more complex. For example, for certain over-the-counter (“OTC”)
derivatives, the only pricing information will be from brokers dealing in those derivatives
and, in some cases, only from the counterparty trading with the fund. For other
investments, such as a private investment, there may be no readily ascertainable market
value after the initial investment is made until the investment is realized. As such,
potential conflicts in valuing these investments may be more pronounced.

Many financial institutions invest in illiquid or hard-to-value instruments and face

the same challenges as hedge funds. Established mechanisms for minimizing conflicts
include implementing a system of segregation of functions and controls with appropriate
oversight. This Report adopts this approach by establishing clear practices for effective
control and segregation systems.

The framework in this Report also establishes a governance mechanism, such as a

valuation committee, which will have ultimate responsibility for establishing and
monitoring compliance with the manager’s valuation policies.

Some have suggested that the use of third-party service providers can effectively
eliminate valuation conflicts. We believe administrators can be helpful in taking on some
of the responsibilities related to pricing the portfolio and providing checks and balances
in support of the manager’s policies. However, we do not believe that investors or

vi
managers should take undue comfort from the independence a third-party administrator
brings to the valuation process, especially where a manager invests in hard-to-value
assets. In such cases, it is appropriate, and indeed may be necessary, for the manager to
be involved in the valuation process given that the manager may have the most
knowledge about the assets in question. In addition, firms must still have appropriate
infrastructure and resources to understand the valuation of their funds’ portfolios and not
place undue reliance on outsourcing. What is critical is that, whether or not the fund has
a third-party administrator, the manager needs to have in place a valuation framework
that provides for consistent application of a valuation policy and appropriate segregation
of functions between portfolio managers and non-trading personnel who are responsible
for implementing the valuation process.

We also believe that it is useful for investors to understand what portion of the
fund is comprised of hard-to-value assets. Financial Accounting Standard 157 (“FAS
157”) establishes a useful hierarchy of assets based on the reliability of available pricing
information: Level 1 assets have observable market prices (such as New York Stock
Exchange-listed stock prices); Level 2 assets have some observable market price
information other than quoted market prices (such as broker quotes for certain OTC
derivatives); and Level 3 assets have no observable market price information (such as
private equity investments).

GAAP will soon require the percentage of assets at each level to be reported on an
annual basis, as well as the percentage of realized and unrealized profit and loss (“P&L”)
that is derived from Level 3 (the most illiquid and difficult-to-value) assets. This
information will help investors understand what types of assets are contributing to the
fund’s performance and, in particular, how much of the fund’s performance is coming
from more difficult-to-value assets.

Recognizing the value of this kind of information, this Report also recommends
that managers go beyond the requirements of GAAP and report the percentage of their
assets that are in each FAS 157 level to investors more frequently (at least quarterly), and
provide the realized and unrealized P&L information for Level 2 assets in addition to
Level 3 assets (also at least quarterly). Given that FAS 157 has not yet been fully
adopted, we recognize that implementation of this practice will take time and require
consultation with the fund’s independent auditors.

We have also provided specific guidance on side pockets. A “side pocket” is an

increasingly common mechanism used to account for certain investments in a fund that
are illiquid and have no readily ascertainable market value. Side pockets are generally
limited to investors who are invested at the time the investment is made and redemptions
from side pockets are generally not permitted until the investment is removed from the
side pocket account upon realization of a gain or loss.

By limiting participation in side pockets in this way, funds can protect investor
interests by avoiding having them enter or exit such investments in the absence of reliable

vii
valuations. Most funds do not earn any incentive fee on the side-pocketed investment
until the investment is deemed realized (i.e., when some kind of market-based pricing
information is available). Thus, an added advantage of side pockets is that they mitigate
the valuation conflict for such investments. This Report provides guidance on the
appropriate use of side pockets. In particular, it suggests considerations managers should
use in deciding whether to move an investment into or out of a side pocket, in valuing the
assets in the side pocket, and in determining both fees and the associated
investment/redemption restrictions.

(iii) Risk Management

Risk is inherent in investing and cannot be eliminated. Simply put, taking risk is
essential for returns. The first and most important aspect of risk management is that a
manager determines the overall risk profile for the fund. The risk profile will depend
upon the fund’s size and strategy and the manager’s portfolio management process.

We recommend that managers adopt a comprehensive framework to measure,

monitor, and manage risk consistently with the intended risk profile. The common
elements of the framework should be that managers identify risks to the portfolio,
measure the principal categories of risk (such as liquidity risk, leverage, market risk,
counterparty credit risk and operational risk), adopt policies and procedures that establish
monitoring and measurement criteria, maintain a regular and rigorous process of risk
monitoring, and retain knowledgeable personnel to measure and monitor risk.

Once a risk profile is determined, managers can develop a risk management

process to measure, monitor and manage risk in order to achieve that intended risk
profile. Disclosure to investors will then enable them to assess whether the risk profile is
appropriate for them and their portfolios and how the investment is performing in light of
that profile. This Report recommends that managers regularly disclose risk information,
including an appropriate qualitative discussion that will help investors understand how
the manager views the fund’s risk profile. We recognize, however, that confidentiality
remains important to the manager’s business, so it is not expected that investors will be
provided with all information used to monitor risk.

Because risk management is embedded in investment philosophy, the risk

management process will necessarily vary by fund. Specifically, it will vary based upon
the investment strategy, the instruments traded, leverage, and the overall risk profile.
Therefore, this Report provides illustrative examples of how firms can approach different
aspects of their risk measurement, monitoring, and management process, including
desirable management tools for liquidity, leverage, market, counterparty, and operational
risk. Managers should evaluate these practices in light of their fund’s size, nature of
business, portfolio management processes, and chosen investment strategies.

Finally, hedge funds deal with many counterparties, including prime brokers,
derivatives dealers and lending, trading, cash management and depositor counterparties.
Many of these are sources of liquidity. Depending on the extent of the fund’s exposure,

viii
counterparty failure could have serious consequences for a fund’s access to liquidity and
overall success. We therefore recommend that managers assess the creditworthiness of
counterparties and understand the complex legal relationships they may have with prime
brokers or lending or derivative counterparties and their affiliates.

(iv) Trading and Business Operations

As hedge funds have become increasingly complex organizations trading in

markets all over the world, operational requirements have increased. As a result, strong
trading and business operations are more critical than ever to the sound and effective
operation of hedge funds. These include processes for documenting relationships with
counterparties, establishing appropriate infrastructure to accommodate the types of
investments traded by the fund and adequately managing and accounting for the fund’s
internal operations. Managers must continuously assess the effectiveness of their
operational and internal controls.

This Report recommends a comprehensive framework for a manager’s trading

and business operations. Here, too, the diversity among managers’ operations and fund
strategies means that considerable flexibility is required. Nevertheless, we believe there
are elements that should be common to all managers: a member of senior management
with responsibility for operations, supported by adequate resources; policies and
procedures that address segregation of duties and reconciliation; checks and balances in
operations and systems; and infrastructure and automation commensurate with a
manager’s business.

The sound and effective management of trading and business operations supports
a manager’s ability to achieve best industry practice in all of the other areas identified in
this Report. For example, a manager’s trade documentation and settlement procedures
are critical to accurate valuation and disclosure to investors. In addition, having adequate
procedures to control the creation of counterparty relationships is a critical part of
counterparty credit risk management.

(v) Compliance, Conflicts and Business Practices

It is critical that there be a continued commitment to the highest standards of

integrity and professionalism within the industry. We recommend that managers have a
comprehensive framework that includes a written code of ethics; a written compliance
manual, including a process for handling conflicts of interest and a robust training
program to educate personnel regarding the manager’s policies; and a compliance
function that includes a Chief Compliance Officer, appropriate discipline and sanctions
and an annual review of the compliance framework. Managers must implement the
elements of the framework in light of their business and the size, strategy and profiles of
their funds.

Regardless of size or structure, this framework must be supported by a culture of

compliance that begins, first and foremost, at the very top of the organization. The role

ix
of the Chief Compliance Officer is undoubtedly of critical importance, but a Chief
Compliance Officer alone cannot establish this culture. A successful compliance culture
means a commitment from the most senior levels of management and an environment in
which each person within the firm regards compliance as his or her own responsibility
and feels empowered to raise concerns. This level of commitment is essential to achieve
the results that investors and market participants are entitled to expect.

One issue of particular focus is conflicts of interest. As previously discussed, the

potential for conflicts exists across the financial services industry and must be addressed
for investors to continue to have confidence in the manager and in the financial markets
as a whole. We again looked to the experience of the financial services industry. The
major investment banks were asked by the SEC to identify and analyze potential conflicts
in their business. In this Report, we have taken it upon ourselves to identify potential
conflicts relevant to the hedge fund industry, to help managers evaluate where conflicts
might arise based on their own structure and operations. Many can be addressed with
specific policies. However, it is impossible to anticipate every potential conflict.
Accordingly, we recommend that managers establish a Conflicts Committee as the focal
point for reviewing potential conflicts and addressing them as they arise.

Context for the Report

President’s Working Group on Financial Markets

The PWG was established by Executive Order in 1988. The PWG was given the
mandate to enhance the integrity, efficiency, orderliness, and competitiveness of U.S.
financial markets and to maintain investor confidence. The PWG includes the Secretary
of the Treasury, the Chairman of the Board of Governors of the Federal Reserve System,
the Chairman of the Securities and Exchange Commission, and the Chairman of the
Commodity Futures Trading Commission, or their designees.

In February 2007, the PWG released a set of principles to guide financial

regulators as they addressed the rapid growth of private pools of capital.3 The principles
provided a foundation to address issues of investor protection and systemic risk. This
Report is intended to take these principles and establish best practices to enable managers
to operate their firms in a way consistent with the PWG’s principles and guidelines.

Industry Practices

Many managers throughout the industry have developed strong and effective
practices addressing many of the areas upon which we focus in this Report. Those
managers have found that implementing strong internal controls and business practices
has provided a platform for stability and growth, enhanced client relationships, and

3
We refer to “private pools of capital” in this Report as hedge funds.

x
enabled them to carry out investment activities more effectively and efficiently. We have
drawn upon many of these practices in drafting this Report.

We also reviewed the existing recommendations for sound industry practices

developed by a variety of other groups, such as the Managed Funds Association, the UK
Hedge Fund Working Group, the International Organization of Securities Commissions
and the Alternative Investment Management Association. Their work had a significant
impact on our thinking about this Report.

xi
 Acknowledgements

The AMC wishes to acknowledge and encourage the excellent work done by
these and other groups in developing recommendations for sound practices in the hedge
fund industry:

• The Managed Funds Association (MFA)

• The UK Hedge Fund Working Group (HFWG)
• The Alternative Investment Management Association (AIMA)
• CFA Institute
• Counterparty Risk Management Policy Group
• Dubai Financial Services Authority (DFSA)
• Financial Services Authority (FSA)
• International Organization of Securities Commissions (IOSCO)
• The Greenwich Roundtable

The AMC also wishes to thank the various members of the financial services
industry that contributed time, expertise and perspective throughout the preparation of
this Report. We heard from many interested parties and were very pleased with their
interest in, and consideration of, the issues in the Report. In particular, the AMC wishes
to acknowledge the contributions of PricewaterhouseCoopers LLP and Ernst & Young,
who provided valuable assistance by helping the members of the AMC to develop the
Recommendations on Valuation, and also Morgan Stanley and Goldman Sachs, who
shared their perspectives as prime brokerage and other counterparty entities.

xii
 BEST PRACTICES

Disclosure and Investor Protection

Disclosure Framework

A Manager should establish a disclosure framework designed to disclose material

information to investors with sufficient frequency and detail, including with respect to
financial and risk information and potential conflicts of interest, so that investors are able
to (i) make informed decisions regarding investments in the fund and (ii) appropriately
monitor or manage the risks associated with exposure to the fund. A robust disclosure
framework is critical to the protection of investors’ interests. The framework should also
include guidelines to address providing information to counterparties (commensurate
with the relationship with the counterparties), subject to appropriate assurances of
confidentiality.

The framework should include:

1. The information to be provided to investors and the manner and frequency

with which it will be provided (recognizing that disclosure to investors
may take a variety of forms), including:

(a) An offering or private placement memorandum (“PPM”);

(b) Annual audited financial statements;

(c) Performance information;

(d) Investor communications (such as letters) and other reporting (such as

risk reports); and

(e) Timely disclosure of material information in certain circumstances.

2. Guidelines for the disclosure of potential conflicts of interest;

3. Guidelines for the qualifications of investors in the fund; and

4. Guidelines relating to disclosure to counterparties.

I. Disclosure of Material Information to Investors

1. Disclosure begins with the fund’s offering document, typically a PPM.

The PPM outlines the scope of the fund’s operations, including broad
descriptions of the investment philosophy, strategies and products, as well
as the significant risks of an investment in the fund.

1
 (a) A Manager should provide potential investors with a PPM or other
offering documents or supplemental materials sufficiently in advance
of a subscription to permit investors to adequately consider that
information in formulating their investment decisions.

2. For funds open to new investments, PPMs should be updated or

supplemented when a material change occurs that makes the PPM
materially inaccurate or misleading in light of other information
previously provided by the Manager.

3. For funds open to new investments, the Manager should review the PPM
annually to assess whether, in light of ongoing developments in the fund,
it is appropriate to provide additional information or more detail regarding
any matters in the PPM. Any updated PPMs should be provided to all
investors in the fund.

4. The following is a (non-exhaustive) list of types of information that should

be included in a PPM (to the extent such information is material and
relevant to the fund):

(a) The legal structure of the fund, including jurisdiction of organization

and control of the Manager of the fund;

(b) The fund’s investment objectives, strategies and permissible

investments;

(c) The key investment management and other senior personnel acting on
behalf of the fund, including:

(i) Biographical information (including relevant educational and

employment history and other business activities engaged in by
any such person); and

(ii) Information regarding any material violations of securities or

investment-related laws or regulations, or any disciplinary action
for professional misconduct taken against any such person.

(d) The terms of an investment in the fund, including:

(i) A description of applicable fees and charges, including the

fund’s compensation structure (e.g., the calculation of incentive
fee (or allocation) arrangements and management fees);

(ii) Allocation of expenses such as research, legal fees and travel

(i.e., which expenses are borne by or among the fund(s) and
which are borne by the Manager);

2
 (iii) A description of withdrawal or redemption rights and restrictions
(including withdrawal payment provisions, lock-up periods,
notice requirements, withdrawal penalties or fees, gates,
withdrawal suspension provisions and other redemption
limitations, including variations in the time frame for investor
redemptions);

(iv) Whether fees may be paid by the fund to affiliates of the

Manager and, if so, for what services;

(v) A description of the Manager’s trade allocation policies;

(vi) Provisions relating to liability and indemnification of the

Manager to and by the fund; and

(vii) A description of the Manager’s framework for providing

information and financial statements to investors.

(e) Discussion of the elements of the Manager’s valuation framework,

such as:

(i) The use of fair value accounting in accordance with generally

accepted accounting principles (“GAAP”) in calculating
valuations and net asset value (“NAV”). The discussion should
also address the use of any non-GAAP measures to compute and
report certain asset valuations, fees, subscriptions or
redemptions;4

(ii) The role of any third parties, including (where applicable) the
fund’s third-party administrator, with significant involvement in
the valuation of the investment positions in the fund’s portfolio;
and

(iii) A description of the Manager’s valuation policy and the manner

in which the Manager oversees its valuation policy, such as a
Valuation Committee. A Manager’s valuation policy should
include (to the extent relevant):

4
Throughout this Report, reference to GAAP is to U.S. generally accepted accounting
principles. However, the Report recognizes that there are other broadly accepted accounting
principles, notably the International Financial Reporting Standards (IFRS), which a Manager
may adopt for its funds. This Report supports the use of standards substantially similar to
GAAP.

3
 ● A description of the methodologies used to value the fund’s
investment positions, including the methodology used in
valuing various types of investment positions and the use of
internal and external pricing sources;

● Ways in which the Manager mitigates potential conflicts of

interest in the valuation process (including involvement of
portfolio management personnel in the valuation process);
and

● Use of side pockets (where applicable), including the criteria

for determining when and whether to place investment
positions in side pockets, the valuation of the investment
positions, the basis on which fees are charged and any
associated investment/redemption restrictions.

(f) The possible risks associated with an investment in the fund, such as
risks associated with:

(i) The fund’s incentive fee (or allocation) arrangement;

(ii) Reliance on and potential loss of key investment personnel;

(iii) Lack of assurance as to the success of the fund’s investment

strategies;

(iv) Specific strategies or particular types of investment instruments

and markets;

(v) Valuation of investment positions, including valuation of

investments with no readily ascertainable market value (see also
the section on Valuation);

(vi) Limited liquidity and potential restrictions on redemptions

(including restrictions relating to redemption gates, side pocket
investments and withdrawal suspensions);

(vii) Use of leverage and margin (including leverage embedded in

derivative instruments) and the possible loss of funding;

(viii) Broker and other counterparty credit risk exposure and impact of
potential failure;

(ix) Investments in foreign jurisdictions;

(x) Presence or absence of regulatory oversight; and

4
 (xi) Other factors related to investment strategy or products that
make an investment speculative or risky.

(g) Potential conflicts of interest in the fund’s operations (see also the
section on Compliance, Conflicts and Business Practices);

(h) Tax, regulatory and other legal matters relevant to the fund, including
timing on the provision of Schedule K-1s (where applicable);

(i) Identity of any third-party administrator(s) used by the fund; and

(j) Use of prime brokers or other lending sources.

II. Ongoing Information Provided to Investors

1. The Manager should provide investors with updated, material information

on a regular and ongoing basis and communicate that information to
investors as set forth in the Manager’s disclosure framework.

(a) The nature of the communications and the information included in the
communications described below should be tailored as appropriate to
the structure of the Manager and the fund, consistent with the
principles outlined in this section and recognizing, in certain
circumstances, the importance of protecting confidential information
that, if disclosed, could adversely impact the interests of the fund’s
investors.

(b) Updated information may be communicated to investors in a variety of

forms, depending on the nature of the information being
communicated (i.e., whether the information is a material development
or part of the regular or ongoing provision of information about the
fund).

2. The following are types of information that Managers should consider

providing to investors:

(a) Investor Letters or Other Similar Communications – For many

Managers, investor letters (or other similar communications) provide
the opportunity to communicate in their own voice. Accordingly, it
may be written in any form or style that the Manager desires
(preferably on a quarterly basis) and would generally be expected to
include updated information on developments relating to the fund,
such as:

(i) Significant shifts in investment strategy or key risk exposures

(such as market, credit, leverage, liquidity, and operational risk);

5
 (ii) Changes in key personnel;

(iii) Performance information together with examples or narrative as

the Manager considers appropriate or useful (discussed further
below); and

(iv) Business, market or other significant developments, as

appropriate.

(b) Risk Reports – Given the dynamic nature of the risks in the portfolio,
many Managers send risk reports to investors to provide information
regarding the fund’s risk profile. Because the extent of risk taken and
the approach to risk management are integral to the investment
approach of a Manager, a Manager should disclose its approach to
investors and provide information it believes will be informative to
investors in light of that approach. Accordingly, a Manager should
communicate regular risk information (preferably on a quarterly basis)
that is appropriate to the fund and its investment strategies, such as
information regarding:

(i) Assets under management;

(ii) Risk management (including qualitative discussions, as

appropriate), including:

● Asset types;

● Geography;

● Leverage employed in the fund (including the basis on which

it is calculated);

● Concentration of positions; and

● Material changes in asset allocation.

(c) Performance-Related Financial Information – Regular reporting of

performance may take a variety of forms and should be provided with
a frequency established by the Manager that is appropriate to the
nature of the fund and the information being provided. The timing and
content may include:

(i) Quantitative information:

● Annual audited financial statements prepared in accordance

with GAAP;

6
 ● Estimated fund performance that clearly indicates it provides
only an estimate of the fund’s performance and may not
include other material expenses and items that go into
calculating NAV (e.g., it may not include fee and expense
accruals);

● NAV to each investor, which should reflect each investor’s

specific capital account balance or share value, taking
account of fee and expense accruals in addition to trading
profit and loss attributable to each investor’s capital account.

(ii) Qualitative information about fund performance:

● The goal of this information is to provide a narrative

description, from the Manager’s perspective, that will help
investors better understand the fund’s financial performance
during the relevant period of time, recognizing that financial
statements provide limited opportunities for qualitative
discussion. This discussion may be in any form (e.g.,
investor letters, annual summaries or other disclosure) that
the Manager desires and should include factors underlying
the fund’s performance.

(d) Investment-Related Financial Information and FAS 157 – In

addition to performance information, the Manager should provide
financial information supplementing FAS 157 to help investors assess
the risks in the valuation of the fund’s investment positions (i.e., the
potential for variability in the ultimate realization of the fund’s
investment positions). Although FAS 157 is not required to be fully
implemented until the end of audit year 2008, managers will need to
work closely with their auditors throughout the year for purposes of
implementing it and the related practices. Depending upon the extent
to which the Manager invests in illiquid and difficult-to-value
investments, the disclosures should occur at least quarterly and
include:

(i) Disclosure of the percentage of the fund’s portfolio value that is

comprised of each level of the FAS 1575 valuation hierarchy:

5
FAS 157 establishes a “fair value hierarchy” that differentiates between the types of inputs
used to determine the fair value of an asset or liability. The level in the fair value hierarchy
within which the fair value measurement is classified is determined based on the lowest level
input that is significant to the fair value measurement in its entirety. The examples provided
are for illustration only and will vary depending on the facts and circumstances surrounding

7
 Level 1 (generally assets that can be priced using exchange or
other highly liquid market prices), Level 2 (generally assets that
have no quoted price but for which there are similar assets with
quoted prices or pricing models using significant observable
inputs) and Level 3 (generally assets for which observable prices
or inputs are not available and that are generally priced using
models or other valuation techniques); and

(ii) Supplementing FAS 157’s requirement that Managers disclose

the percentage of realized and unrealized profit and loss (P&L)
that is derived from Level 3 assets, by making such disclosure
with respect to Level 2 assets.

● If the Manager deems it advisable, the Manager should

discuss with its auditors or counsel how the information set
forth above should be provided (e.g., on a net or gross basis)
and inform investors of the chosen methodology. In
addition, the Manager should identify if the manner of
determining the information is not consistent across positions
or levels.

(e) Quotes – Managers should consider disclosing the percentage of the

value of the fund’s portfolio for which only one quote was relied upon
and the percentage for which multiple quotes were relied upon.

(f) Specific Event Reporting – In certain circumstances, it is appropriate

to disclose updated information or the occurrence of specific events to
investors on a more timely basis than that provided in the regular
course of the Manager’s disclosure framework.

(i) As with all its disclosure to investors, Managers should assess

the materiality of the event in considering whether disclosure is
appropriate. In determining the appropriate timing and form of
any reporting of specific events to investors, Managers should
take into account factors such as:

● The nature of the information;

● The fund’s investment program;

the asset valuation. This Report notes that FAS 157 is not required to be fully implemented
until the end of audit year 2008.

8
 ● Whether disclosure of such information may compromise the
fund’s competitive position or ability to properly manage the
portfolio; and

● Whether the fund is currently accepting subscriptions or

redemptions.

(ii) Depending on the circumstances, the following are types of

information that should, when material, be disclosed to investors
promptly after occurrence:

● Changes to the fund’s valuation policies;

● Changes to certain key investment personnel (e.g., partners

and executive officers) or with key third-party service
providers (such as the fund’s administrator) other than in the
ordinary course of business;

● Changes in biographical or disciplinary information in

respect of investment and other key personnel of the
Manager;

● Entry into side letters (or parallel managed accounts) that

grant terms to certain investors that may, in certain
circumstances, adversely impact other investors (discussed
further below in sub-section III.A);

● Occurrence of operational issues that may have an adverse

impact on the fund; and

● Discovery of fraud or wrongdoing by the Manager or a

significant service provider.

3. A Manager should endeavor to provide all investors with a consistent level

of information. In providing diligence information, a Manager may
consider developing its own standard presentation.6 Managers may
employ different forms of presentation among investors, or individually
answer questions from investors in the course of due diligence reviews or
ongoing investor inquiries, provided the Manager does not selectively
disclose material information among investors.

6
Managers may wish to look to guidance provided by the Managed Funds Association’s 2007
Sound Practices for Hedge Fund Managers and the Alternative Investment Management
Association (AIMA) in developing a standard presentation.

9
 4. Where a Manager receives requests from an investor for additional
disclosure or clarification of existing disclosure, the Manager should
consider whether to make the disclosure and, if appropriate, should be
willing to make such information available to all investors upon request.

III. Side Letters and Parallel Managed Accounts

A. Side Letters

1. A “side letter” generally means an agreement whereby a Manager agrees

to provide an investor with certain information, makes certain
representations or provides investment terms in the fund that are not made
available to other investors in the fund. While the use of side letters may
frequently benefit all investors in the fund (e.g., in that it enables a
Manager to attract early or large investors), or otherwise be immaterial to
other investors, in certain circumstances the terms of a side letter may
have the potential to adversely impact other investors in the fund.

2. In circumstances where side letters provide certain investors with terms

that may adversely impact other investors in the fund, the Manager should
make such disclosure as may be reasonably necessary to enable other
investors to assess the possible impact of such side letters on their
investments.

3. The Manager should disclose, in the manner the Manager deems

appropriate, the existence and terms of side letters containing terms such
as those set forth below, which are generally more likely to adversely
impact other investors:

(a) Enhanced control rights (e.g., over investment decisions or the hiring
of or changes in key personnel);

(b) Preferential liquidity/redemption rights, “key personnel” provisions

and redemption “gate” waivers;

(c) If preferential fees are made available, a statement to that effect; and

(d) Terms that materially alter the investment program disclosed in the
fund’s offering documents.

B. Parallel Managed Accounts

1. A “parallel managed account” is an arrangement whereby an investor

provides discretion to a Manager to invest in substantially the same
strategies as it employs for the fund, but invests through a separate
account rather than through the fund itself. Parallel managed accounts

10
 may be sought by investors for a variety of reasons, including the need to
comply with particular regulatory requirements or to impose limits on the
fund’s investment program beyond what has been agreed to by other
investors in the fund.

(a) In certain circumstances, parallel managed accounts may give rise to

issues similar to those arising in the context of side letters or may
provide investors with terms that may, under certain circumstances,
adversely impact other investors in the fund.

(b) In such circumstances, the same principles that apply to the disclosure
of side letters should apply, as appropriate, to the disclosure of parallel
managed accounts.

IV. Participation of Investors

1. Managers should evaluate whether, and document how, each investor’s

qualifications satisfy requisite legal standards appropriate to the structure
of the fund, typically through subscription agreements. In addition to
addressing the specific standards necessary for exemptions from
registration under the Securities Act of 1933, the Investment Company
Act of 1940 and other applicable U.S. and non-U.S. registration
requirements, Managers should obtain representations from investors that
the investor is likely to understand the material risks of investing in the
fund, such as:

(a) An acknowledgement that the investor has received and understands

the fund’s PPM and organizational documents, has had an opportunity
to obtain additional information and ask questions of the Manager and
is making an independent investment decision based on these
documents and the investor’s independent investigation of the fund;

(b) An acknowledgement that the investor has the experience and

knowledge in financial and business matters necessary to evaluate the
merits and risks of the investment, is able to bear such risks and has
obtained the information necessary to make this assessment with
respect to such risks; and

(c) An acknowledgement that the investor understands the terms of its

investment and the operation of the fund, including minimum
investment, withdrawal rights, liquidity provisions, allocation and fee
structure and other terms that the Manager thinks appropriate.

11
V. Disclosure to Counterparties7

1. A Manager should foster positive and cooperative relationships with credit

and lending counterparties (including prime brokers, derivative
counterparties and other creditors), so that both the Manager and
counterparties may adequately assess the risks associated with the
relationship. Commensurate with the scope and nature of the relationship
between the Manager and its counterparties, the Manager and its
counterparties should agree at the beginning of their relationship as to the
types of information and frequency with which it will be provided. Types
of appropriate information may include:

(a) Quantitative and qualitative disclosures regarding the strategies

employed by the fund and the allocations between or among such
strategies;

(b) Disclosure of the Manager’s risk management framework (including

its approach to market and liquidity risk); and

(c) Quantitative and qualitative disclosures of the fund’s performance and

NAV.

2. In making disclosures to counterparties, the Manager should be willing to

assist counterparties in understanding and interpreting disclosures. This
may include making investment management and other key personnel
available upon reasonable request of the counterparty to answer questions
as part of counterparty due diligence.

3. As a general matter, the Manager should consider whether it is appropriate

for the level of communication with its counterparties to increase under
certain circumstances (e.g., during times of market stress that may affect
the fund’s strategies and performance, including during periods of
increased volatility or tightening credit terms).

4. In connection with any disclosures to counterparties, the Manager should

consider information about the counterparties’ information barriers and
policies regarding the separation of functions generally and consider
whether it is appropriate to seek assurance, as part of its counterparty
contracts, that financial and other confidential information provided by the
Manager is only used for credit evaluation purposes and will not be made

7
Additional guidance and discussion of information sharing with counterparties is provided in
the Report of the Counterparty Risk Management Policy Group II, Toward Greater Financial
Stability: A Private Sector Perspective (July 27, 2005).

12
available to any member of the counterparties’ trading desk(s) or
department(s).

13
 Valuation

Valuation Framework

A Manager should establish a comprehensive and integrated valuation framework to

provide for clear, consistent valuations of all the investment positions in the fund’s
portfolio, while minimizing potential conflicts that may arise in the valuation process.

The framework should include:

1. A governance mechanism, such as a Valuation Committee or other

responsible body; this body should have ultimate responsibility for (i)
establishing and reviewing compliance with the Manager’s valuation
policies and (ii) providing consistent and objective oversight and
implementation of the Manager’s valuation policies and procedures;

2. The development by the Manager of well-documented valuation policies,

as well as guidelines to evaluate exceptions and to test and review
compliance with policies and procedures; and

3. Sufficiently knowledgeable and independent personnel supported by

adequate resources that are separate from and do not report to the trading
or portfolio management function and that are responsible for the
valuation of the fund’s investment positions and for implementing the
Manager’s policies and procedures.

I. The Valuation Committee

1. A Manager should establish a governance mechanism, such as a valuation

committee or other responsible body (referred to herein as the “Valuation
Committee”) that has oversight responsibility for the Manager’s valuation
framework.

2. Participants in the Valuation Committee should include key members of

the Manager’s senior management (such as its Chief Executive Officer
and Chief Financial Officer, if applicable, it being understood that their
responsibilities may include portfolio management).

(a) While it will often be useful and important for portfolio managers or
trading personnel to participate in the Committee (e.g., to assist the
Committee in understanding and evaluating the valuation of certain
investment positions, especially those with no readily ascertainable
market value), the Committee should be structured to provide an
appropriate measure of independence from the portfolio management
function. The goal is to enable the Committee to benefit from the

14
 expertise of such personnel while mitigating potential conflicts of
interest created by their involvement with the Committee.

(b) Once established, the role of the Committee should be designed based
on the structure, investment strategies and portfolio of the fund.
Typical functions the Committee should perform include:

(i) Developing the methods and sources used for valuing various
classes of investment positions and material changes in such
methods and sources;

(ii) Reviewing and approving the Manager’s guidelines and policies

for classification of the fund’s assets within FAS 157’s valuation
hierarchy;

(iii) Where broker quotes are relied upon to value a particular type of
asset, reviewing quantitative and qualitative information such as
the appropriateness and consistency of the sources (e.g.,
counterparty, prime broker or other source), recent trade activity
and outliers and, where appropriate, the process by which such
quotes are obtained and reconciled (such process having been
appropriately documented);

(iv) Approving the final valuations for the fund’s portfolio (and
reviewing reconciliations with the fund’s third-party
administrator, where applicable); and

(v) Designating certain individuals or groups (discussed below in

sub-section II) to be responsible for undertaking or reviewing
certain valuation decisions.

3. The Committee should periodically review the Manager’s valuation

policies and procedures, including whether any patterns emerge that
warrant modifications. Reviews should be conducted no less frequently
than annually, or upon the occurrence of certain material events (e.g., a
shift in the fund’s investment strategy, geographies, assets, instruments or
sectors, or a change in market conditions or availability of pricing
information for certain types of investment positions).

(a) Reviews should address issues such as:

(i) The fairness of the valuation policies and their consistent

application;

(ii) The continued ability of the Manager’s personnel to consistently,

fairly and accurately apply the valuation policies;

15
 (iii) The selection and oversight of third-party service providers with
significant involvement in the valuation process (including, if
any, the fund’s administrator) and the continued ability of those
providers to consistently, fairly and accurately apply the
Manager’s valuation policies;

(iv) Valuation methodologies used by the Manager and appropriate

changes in inputs or market conditions; and

(v) Any material exceptions that were made to the fund’s valuation
polices and procedures (e.g., material price overrides).

(b) Part of this review should include periodically back-testing a sample of

valuations, to the extent possible and where it is likely to provide a
reasonable base of comparison, against the recent sale prices of
investment positions. The goal of the analysis is to provide an input to
the Manager to help it assess the quality of models and other
evaluative processes being employed internally or by third-party
service providers. As such, back-testing may be particularly
appropriate for assets in Levels 2 and 3 of the FAS 157 valuation
hierarchy.

(i) The focus of any back-testing would be on identifying trends in

valuations versus sale prices, not the accuracy of individual
marks for individual investment positions. Differences should
be expected and viewed in the context of the overall analysis,
especially since back-testing has inherent limitations,
particularly during periods of market stress.

4. Finally, the Committee should have the authority and resources available
to consult with the fund’s independent auditor, third-party administrator (if
any), a third-party valuation firm or legal advisor, when appropriate, to
understand and assess new accounting requirements impacting fair value
and in situations where it is unclear how the valuation policy should be
applied to certain investment positions or to unique facts and
circumstances.

II. Personnel Responsible for Implementing the Valuation Policies

1. A Manager should have knowledgeable and qualified internal personnel

(who may also perform other functions for the fund) or qualified third
parties to implement the valuation policy on a day-to-day basis. As a
general matter, the Manager should have a sufficient complement of
personnel (internal or external) with an appropriate level of knowledge,
experience and training that is commensurate with the nature, size and
complexity of the fund’s portfolio.

16
 2. The personnel carrying out the valuation function should be responsible
for the appropriate pricing of the portfolio in accordance with the
valuation policy and should handle the collection and evaluation of
counterparty prices, broker quotes, exchange prices and third-party pricing
feeds.

3. The valuation personnel should be appropriately segregated from the

Manager’s portfolio management personnel. While portfolio management
personnel may be consulted on pricing issues, the valuations should be
approved by the Valuation Committee.

(a) To maintain appropriate segregation of duties and responsibilities

between portfolio management personnel and personnel responsible
for valuations (while recognizing that portfolio management personnel
may have better expertise in valuing certain positions), the Manager
may develop a process for portfolio management personnel to
“challenge” the determinations of valuation personnel. In such
situations, to maintain appropriate segregation of duties, the ultimate
decision as to the appropriate price for a “challenged asset” would be
made by participants in the Valuation Committee after consideration
of pricing support provided by valuation personnel and input from the
applicable portfolio management personnel.

III. Valuation Policies and Procedures

1. The adoption and implementation of comprehensive, written valuation

policies and procedures, consistent with best industry practice, is critical to
the design and effectiveness of the Manager’s portfolio valuation process.
The valuation framework should be designed to promote consistent
application of such policies and procedures and seek to provide
appropriate information to investors and counterparties with a clear
understanding of the limitations of such policies and procedures.

A. Baseline Elements of the Valuation Policy

1. The following are elements of the valuation policy that a Manager should
consider adopting (to the extent such policies are relevant to the fund).
Policies that:

(a) Identify (by title or group) the parties (inside and outside the Manager)
engaged in the valuation process:

(i) This would include external parties involved in the valuation

process (e.g., fund administrators or third-party valuation firms),
participants in the Valuation Committee and personnel

17
 responsible on a day-to-day basis for implementing the
Manager’s valuation policies.

(ii) With respect to external parties involved in the valuation

process, the Manager should clearly delineate such parties’ roles
and responsibilities (particularly with respect to third-party
administrators valuing portfolios and with respect to investment
positions where the third party is unable to independently
substantiate prices) and provide for appropriate oversight and
monitoring of the third party.

(b) Establish the appropriate methodologies to be used in valuing various

types of investments:

(i) Valuation methodologies should be established

contemporaneously with the acquisition of a particular type of
asset (where not otherwise already established) and applied
consistently thereafter. Where the Manager undertakes a new
type of investment, the valuation methodology should be
documented and become part of the valuation policy. If there is
a change in the investment that warrants a change in the
application of policy, this change should be approved by the
Valuation Committee.

(ii) Methodologies should include sources of prices for different

types of investment positions, the priority of sources within the
valuation process and how such sources were used, such as:

● Automated price feeds from exchanges and liquid OTC

markets (e.g., for valuing exchange-traded securities);

● Common models used widely by other market participants

and based on market observable inputs such as prices of
similar actively traded assets and liabilities (e.g., for valuing
a total return swap on a corporate bond or exchange-traded
equity);

● Broker quotes for certain OTC securities (e.g., for valuing

convertible bonds and derivatives), including policies to
address the existence and quality of multiple broker quotes
for a particular investment;

● Discounted cash flow analysis and how discount rates are

developed (e.g., for valuing a private loan);

18
 ● Customized or proprietary models used for investment
positions with unique features, based in part on unobservable
(i.e., non-market) inputs (e.g., for valuing a private equity
investment);

● Other valuation methodologies appropriate for the type of

asset; and

● The process used to effect valuation adjustments.

(c) Establish appropriate internal documentation procedures to support the

valuation for each type of asset:

(i) A Manager should generally maintain robust and

contemporaneous documentation to support the valuation of
illiquid investment positions with no readily ascertainable
market value, in accordance with guidelines established by the
Valuation Committee, after considering various qualitative and
quantitative factors. In this regard, it would be prudent for the
Manager to engage in a dialogue with the fund’s independent
auditor in respect of the adequacy of the Manager’s
documentation procedures for its various types of investment
positions.

(d) Establish appropriate procedures for the use of pricing sources,

including price feeds, inputs to models, broker quotes and other
information received from third-party valuation service providers;

(e) Establish appropriate procedures for recording any material exceptions

taken to the Manager’s ordinary valuation policies and the reasons for
such exceptions; and

(f) Provide for procedures and controls to mitigate potential conflicts in

the valuation process.

B. Investment Positions with No Readily Ascertainable Market Value

1. Certain investment positions in the fund’s portfolio may have no readily

ascertainable market value. For many Managers these types of
investments (e.g., private equity investments) are an important source of
potential returns for the fund. Generally, as part of the disclosure in the
PPM, investors should be informed of whether these types of investments
may be made by the fund.

2. While a fund should generally seek competent and independent review or

generation of its final valuations, in the case of investment positions with

19
 no readily ascertainable market value it may be necessary or appropriate to
utilize properly controlled internal valuations given the absence of
adequate external valuations. Accordingly, the Manager must be
particularly vigilant as the potential conflicts inherent in valuing
investment positions can be more pronounced in this context.

3. To mitigate these conflicts, valuation policies and procedures should

address the circumstances in which the Manager may rely upon models,
the required support and documentation when using a model and the
manner and frequency of reviewing models. In particular, any material
exceptions or unusual situations arising in the context of a pricing model
(e.g., the creation of a unique pricing model for a particular asset) should
be documented and reviewed by the Valuation Committee.

C. Side Pockets and Other Similar Arrangements

1. A “side pocket” is an increasingly common mechanism used to account

for certain investments of a fund that are illiquid and have no readily
ascertainable market value. Certain funds provide for side pockets to
protect investors by avoiding the need for them to transact (redeeming or
investing) in respect of such investments, where there is greater inherent
subjectivity in their valuation prior to realization or other key event.
Moreover, by not assessing an incentive fee or allocation until the
investment in a side pocket is realized (or deemed realized) an additional
valuation conflict is avoided.

2. Where a fund provides for the use of side pockets, the Manager should
include in its policies and procedures guidelines regarding their use, such
as:

(a) The appropriate considerations for determining if/when an asset should

be moved into or out of a side pocket (including, where applicable, any
related hedges and financial transactions). Relevant considerations
include:

(i) The availability of third-party evidence of value (i.e., whether

any observable market inputs, broker quotes or other types of
evidence exists that can provide an indication of value);

(ii) The extent to which the investment is inherently difficult to

value (e.g., equity investments in private versus public
companies);

(iii) The nature of the market for the investment (i.e., whether the
market is developed or emerging, highly liquid or illiquid and
the extent to which the market is regulated);

20
 (iv) The anticipated ability to exit the investment (including whether
the investment is freely tradable or subject to contractual, legal
or regulatory limitations on its realization, or, where applicable,
the stage of development of a business and how soon it may be
ready to go public); and

(v) Any applicable contingencies or special events upon which the

investment’s realization will depend.

(b) The policies for valuation of investments held in side pockets (which
should be the same as the policies applied to investments not held in
side pockets, as required by accounting rules). The nature and
frequency of review of particular side pockets should be appropriate to
the type of investment and market conditions that may be expected to
have an impact on that investment.

(c) Regular review and approval by appropriate personnel of any transfer

of an investment to a side pocket, other than at the time the investment
is made. Recognizing that there are many circumstances in which a
transfer of an investment to a side pocket may be appropriate, the
Manager should have a process to review and approve such transfers.
It may be prudent for the Valuation Committee to review or approve
any such transfers.

21
 Risk Management

Risk Management Framework

Risk is inherent in the investment process and is essential for return. The goal of risk
management is not to eliminate risk but to manage it prudently. A Manager should
establish a comprehensive and integrated risk management framework that is suited to the
size, portfolio management process and investment strategies of its funds. Through the
risk management framework, the Manager should identify the risks inherent in its chosen
investment strategies, and measure and monitor its exposure to these risks to be
consistent with the Manager’s intended risk profile. The risk management framework
should be communicated to investors to enable them to assess whether the fund’s risk
profile is appropriate for them and how the investment is performing against that profile.

The framework should address:

1. Identification of material risks to which the portfolio may be subject;

2. Measurement of the principal categories of risk (including liquidity risk,

leverage, market risk, counterparty credit risk and operational risk);

3. A regular process of risk monitoring, appropriate for the size of the fund,
its portfolio management process and the complexity of its investment
strategies;

4. Policies and procedures establishing measurement and monitoring criteria;

and

5. Knowledgeable personnel to measure and monitor risk as established by

the policies and procedures.

I. The Manager’s Approach to Risk Management

A. Identification and Design

1. Senior management should determine the overall risk profile for the fund.

2. The Manager should identify risks and determine how it intends to

manage these risks to meet the fund’s risk profile. The Manager should
develop a risk management process designed to measure and monitor the
risks and enable investors to make informed decisions about the risk
profile of the fund and its fit within their own risk tolerance.

(a) The principal, widely recognized categories of risk are liquidity risk
(including both asset and funding liquidity), leverage, market risk,
counterparty credit risk and operational risk (each discussed further in

22
 sub-section II). The Manager should consider the extent to which
these categories of risk apply to its fund, and the kinds of methods that
will be used to measure, monitor and manage the applicable risks
(such as stress testing and scenario analysis, VaR, volatility measures,
concentrations metrics and other approaches). In particular, stress
testing and scenario analysis are often desirable risk management
practices.

(b) While objective measures of risk are critical to understanding how the
portfolio behaves, qualitative factors are also important when
analyzing portfolio risks.

3. A member of senior management, such as a Chief Risk Officer or person

with similar responsibilities, or a Risk Committee, should establish risk
measurement criteria and implement a process to monitor the portfolio’s
risk profile.

(a) Implementation would be based on the overall structure of the

portfolio, investment and trading strategies, the level of centralization
of the decision-making process, the capital allocation process and
consistency with the overall investment and risk profile of the fund.

(b) When implementing a risk management framework, a Manager should

consider the issues set forth above to determine:

(i) Which risk measures (e.g., capital, concentration or liquidity)

should be monitored within the overall framework; and

(ii) Whether to apply constraints in risk management (such as limits)

and how to apply them (e.g., whether to adopt hard limits, which
can never be exceeded, or soft guidelines, which involve
discussions of the current risk level faced by the portfolio).

B. Measurement, Monitoring and Management

1. Where possible, material risks taken by the fund should be quantified and
monitored at a frequency appropriate to the characteristics of the fund’s
portfolio.

2. Those material risks which are not quantifiable or measurable should still
be monitored.

3. No risk management process is capable of providing a complete

representation of all of the risks facing the portfolio or accurately
measuring every one of those risks. The portfolio should be reviewed on a
periodic basis (the frequency of this review depending on factors such as

23
 the nature of the portfolio and market conditions). This review should
qualitatively assess whether the portfolio is performing consistently with
expectations (based on the identified and measured risks) and, when it
varies, review the factors that might be affecting the portfolio.

4. As risk management is a subjective process, the Manager should

understand the biases and limitations of its chosen risk measurement
methodologies (including models) and adjust for these in measuring and
making decisions about risk.

5. Risk reports describing the portfolio’s exposures to the key risks identified
by the Manager should be prepared and distributed to senior management
responsible for the portfolio with a frequency appropriate to the nature of
the portfolio.

C. Personnel

1. Senior management should appoint knowledgeable personnel to supervise

risk analysis, measurement and monitoring and to take responsibility for
the creation of policies and procedures covering all areas of risk
management.

(a) This supervisory role may be performed by a Chief Risk Officer (or
other person with similar responsibilities) or by a formal Risk
Committee comprised of members of senior management with
sufficient experience and the relevant background to understand the
complexities of the risk framework. In that role, these persons may
also be involved in the portfolio management process.

(b) The Chief Risk Officer (or other person with similar responsibilities)
should have open access to and engage in regular dialogue with the
portfolio managers as well as the fund’s senior management, so that
he/she can acquire a clear understanding of the fund’s positions and
strategies.

2. Senior management should not outsource risk monitoring or management,

and must maintain responsibility for the overall risk framework. If a
determination is made to use the services of an external provider only for
risk measurement, outsourcing should not be a substitute for an adequate
understanding of risk by senior management personnel.

(a) Responsibility for any outsourced parts of the process should continue
to lie with the senior management or its designees, such as the Chief
Risk Officer or designated Risk Committee.

24
II. Categories of Risk

The emphasis on the categories of risk that will need to be measured, monitored and
managed will vary depending on the products the Manager trades, investment strategies,
and frequency of trading it chooses for its funds. Accordingly, within the Manager’s risk
management framework, the Manager should consider what categories of risk are
material to the fund and adopt risk management measures most appropriate to its
investment approach.

To assist Managers in this regard, the balance of this section describes the principal
categories of risk that a Manager may need to measure, monitor and manage in the
operation of its business. The discussion also provides examples of measuring
techniques and risk management tools that may be applicable to each category of risk.

While Managers should reflect on the broad categories of risk (discussed immediately
below), the particular risk management methods undertaken by a Manager should be
appropriately tailored to the specific risks faced by the fund and the fund’s risk profile.
Accordingly, in many cases certain of the risk management tools described below may be
less relevant to a particular Manager, while in other cases a Manager may determine that
it should use risk management tools not described here.

A. Liquidity Risk

1. Liquidity is the Manager’s ability to meet its need for cash. Sufficient
levels of liquidity enable the Manager to meet its obligations. The
following are types of factors that a Manager should take into account in
managing liquidity:

(a) The risk of a reduction in the funding provided by lending

counterparties, including changes to initial margins/credit support and
timing or size of variation margin calls, as per various agreements with
counterparties;

(b) The terms of redemption rights by investors and the amount of

investor capital that is subject to those redemption rights; and

(c) Changes in market liquidity conditions (including trading volume, bid-

ask size and spread and the possible effect of
crowdedness/concentration of trading strategies) that may alter the
ability of the Manager to sell securities with minimum adverse price
impact or otherwise manage the liquidity of the portfolio.

2. The Manager should seek to increase the stability of external factors

affecting the portfolio through prudent agreements with lenders and
investors.

25
 3. The Manager should thoroughly understand and regularly review the
material terms in its credit and lending agreements, including the
interaction of those terms, cross-default and cross-collateralization
provisions, and their impact on collateral management and requirements.
These terms may affect the availability of funding in the event of certain
extreme market conditions or triggering events (e.g., limitations on prime
brokers’ obligations to provide financing under certain circumstances or
NAV triggers) and the overall risk faced by the fund.

4. The Manager should consider regularly conducting liquidity stress

scenario analyses on the portfolio(s) in order to understand and better
manage its ability to meet obligations in light of the fund’s portfolio.

B. Leverage Risk

1. Leverage is the practice of using borrowed money to make investments.

For portfolios without derivative contracts, leverage may be defined as the
market value of assets relative to the fund’s capital. For more complex
portfolios or portfolios containing derivatives, it may be more appropriate
to estimate leverage by analyzing the risk of different strategies and
understanding the potential for extreme losses arising from those
strategies. The Manager should manage its use of leverage to match the
risk profile established for the fund based on its size, portfolio structure
and specific investment strategies. The Manager should monitor changes
in this measure over time as part of its risk management framework, and
should take account of on- and off-balance sheet assets (e.g., derivative
instruments, including OTC derivatives) in measuring leverage.

(a) The Manager should monitor leverage with a frequency appropriate to

the characteristics of the underlying portfolio taking into account the
potential impact of various inter-related factors such as:

(i) Asset types, sectors and positions;

(ii) Overall liquidity profile of the portfolio;

(iii) Trading strategies employed by the Manager;

(iv) Volatility of assets and trading strategies; and

(v) The crowdedness/concentration of trading strategies.

(b) The Manager should thoroughly understand the terms on which prime
brokers, lenders and other trading counterparties provide leverage to
the fund and seek sustainable credit, margin and funding terms in order
to manage its leverage prudently and minimize additional stress when

26
 market conditions become volatile. Important terms may include
constraints on the portfolios (e.g., concentration, diversification and
liquidity limits) and prime brokers’ and counterparties’ rights to alter
these terms.

(c) The Manager should take into account the impact of employing
leverage on any positions with embedded leverage, such as certain
types of derivatives and other structured products.

C. Market Risk

1. Market risk is the financial risk brought about from changes in the market
price of investments in the portfolio. The Manager should regularly
evaluate market risk, incorporating some or all of the following risk
measures, as applicable to the fund’s size and portfolio management
processes and the complexity of its investment strategies. The list below
comprises the primary market risk processes used in the industry. A
Manager should model its risk management framework through the
inclusion of some or all of these in such framework:

(a) Risk exposures for different market variables and asset classes:

(i) The Manager should seek to identify the size and direction of its
exposures to major market risk factors (e.g., equity indices,
interest rates, credit spreads, foreign exchange rates and
commodities prices).

(ii) These exposures should be considered both on a gross (longs

plus shorts) and net (longs less shorts) basis and examined both
within individual strategies and portfolios and across the entire
fund. Risk systems should also distinguish between linear
exposures (i.e., prices that change proportionately with changes
in the overall market) and non-linear exposures (i.e., those that
arise from instruments such as options, convertibles and callable
bonds).

(b) Conducting stress tests and scenario analyses:

(i) The Manager should conduct stress tests and scenario analyses
of its portfolio. Stress testing and scenario analyses can be
useful in assessing the vulnerability of a portfolio to various
events. They should be designed to capture both market events
(directional movements) and situations of market illiquidity.
The frequency of such testing should depend on the nature of the
portfolio, the risks to which it is exposed, the frequency of
turnover and changes in market conditions, among other factors.
27
 The Manager should identify which market variables to stress,
how much to stress them by and over what time frame.

(ii) Stress tests/scenario analyses can be based on standardized

measures, historical events or unique scenario analyses.

● Standardized stress tests involve shocking major market

factors by a constant amount or percentage moves (e.g., “All
interest rates rise by 100 basis points”, or, “Equity prices
drop by 10%”). Using both approaches enhances stress
testing with regard to factors that may undergo regime shifts
(i.e., moving from tight to wider credit spreads, or from a
low to higher volatility environment). These tests are useful
tools to translate risk exposures into potential profits and
losses given a major change in the market.

● Historical scenario analyses aim to measure the expected

behavior of the portfolio if a period of known market stress
reoccurs in the future. The calculation process must adjust
for new instruments and changes in market structure.

● Unique scenario analyses aim to measure the expected

behavior of the portfolio during an unexpected period of
stress, as specified by risk management.

(c) Use of historical statistical risk measures of the portfolio:

Historical risk measures aim to understand the historical behavior of a

portfolio versus expectations and can be used as a predictor of future
behavior when asset composition and market conditions are relatively
stable.

(i) If the Manager determines to monitor historical statistical

portfolio risk measures, the Manager should do so by analyzing
measures such as realized volatility, return as a function of
volatility, worst drawdown, historical beta and correlation with
relevant market indices.

● It is prudent to analyze these measures at a frequency

appropriate to the characteristics of the fund in order to
understand how these realized risk measures may differ over
various time horizons.

(ii) Such measures may become less relevant if the asset or strategy
composition of the portfolio changes frequently, the market
structure evolves (e.g., regime shifts) or the periodicity of
28
 valuation is inappropriate (e.g., daily volatility may be an
inappropriate measure for investment positions that are marked-
to-market monthly).

(d) Use of forward-looking statistical risk measures:

Forward-looking statistical risk measures aim to forecast the expected

behavior of the portfolio through quantitative techniques using
assumptions on the volatility and correlations of assets in the portfolio.

(i) If the Manager determines to use prospective statistical measures

as a risk monitoring tool, the Manager should consider which
forecasted statistical measures are applicable to its portfolio.
Two common, though not universally used, examples are Value
at Risk and Expected Loss.

(ii) When using forward-looking statistical measures, their

shortcomings should be recognized. These measures commonly
use a normal distribution of returns as the basis of the
calculations. However, because financial markets frequently
exhibit unusual, so called “fat-tailed” behavior, many forward-
looking statistics systematically underestimate portfolio risk.
Moreover, assumptions concerning the volatility of the assets in
the portfolio and the correlations between assets may not reflect
actual experience. In addition, these measures may be difficult
to calculate for multi-asset portfolios and portfolios with
optionality.

2. Where applicable to the fund and its investment strategies, the risk
management process should examine whichever it uses of the measures
outlined above at both the overall fund or portfolio level as well as by
individual investment strategy, asset class, industry group, geographical
region or other dimensions.

3. In light of the use of assumptions and uncertainty with respect to events,

risk measures may provide more insight when looked at over time. A
particular data point may be more useful when viewed in the context of
how that same measure has changed over previous days, weeks and
months.

4. It is important to periodically review the performance of models used to

measure and monitor market risk and adjust as appropriate to maximize
effectiveness. This may be performed by measuring risk estimates over
time against the realized return of the portfolio.

29
 (a) Changes to models and assumptions should be made to factor in new
data and to account for previously unrecognized relationships or risk
factors; and

(b) Managers should understand the limitations inherent in risk models,

such as assumptions in the inputs and limitations of historical data.
They should use results from these risk models after quantitatively
taking into account these limitations.

D. Counterparty Credit Risk

1. The Manager should monitor its fund’s exposure to counterparty credit

risk (including, as applicable, prime brokers, derivatives dealers and
lending, trading, cash management and depositor counterparties) and
understand the impact of potential counterparty loss of liquidity or failure.

(a) The Manager should assess creditworthiness when selecting and

transacting with counterparties (recognizing that subsidiaries and
affiliates of counterparties may have different creditworthiness than
parent companies).

(b) The Manager should understand the complexity of the legal

relationships a fund may have with its prime brokers and any other
significant lending or derivatives counterparties and their affiliates,
including:

(i) Understanding the legal entity with which the fund has
contracted and the fund’s ability or inability to close out or net
positions with a certain counterparty or prime broker and its
affiliates in the event of an insolvency proceeding or other
default; and

(ii) Knowing the identity of custodians and sub-custodians used by

the prime broker in various locations and, depending on the
availability of resources, assessing the risk associated with the
use of such custodians and sub-custodians, particularly in
developing markets. Factors to be taken into account include the
risk/reward of investing and the size of the business with that
particular sub-custodian.

2. The Manager should measure and monitor its credit exposure to each
counterparty (as appropriate given the level of the fund’s exposure to each
counterparty).

(a) As part of this process, the Manager should weigh the desirability of
diversifying counterparty credit risk by using multiple prime brokers
30
 and counterparties against any increases in the complexity and
practicality of settlement, reconciliation processes and daily collateral
management. The Manager should dedicate appropriate resources to
manage its collateral movements and, where possible, aim to reduce
mismatches at a counterparty (e.g., by maintaining reasonably hedged
portfolios at each prime broker).

(b) To minimize risk in the event of market stress, the Manager should
consider taking steps to increase its access to liquidity, such as opening
cash and custody accounts at financial institutions other than its prime
brokers.

E. Operational Risk

1. The Manager should have a strong operational infrastructure that is

commensurate with the complexity of its business, to manage and mitigate
operational risks resulting from inadequate or failed internal processes,
people and systems, or from external events.

(a) One or more senior operating officials, who may include a Chief
Operating Officer, with functions separate from investment
management, should oversee the Manager’s operational areas.

(b) The Manager should implement and maintain strong internal controls
to minimize the risk of loss as a result of operational risk.

(c) Controls to reduce operational risk may include (as applicable to a

Manager):

(i) Use and maintenance of a centralized position data set;

(ii) Adoption of trade capture devices; and

(iii) Prompt reconciliation of trading information with the fund’s

prime broker or settlement agent and administrator.

(d) The Manager should monitor its overall level of operational risk, either
internally or through third-party review. This review may take into
account the following characteristics of the Manager (as applicable to
a particular fund):

(i) Assets and products;

(ii) Staffing and resources;

31
 (iii) Infrastructure (including information technology resources,
business continuity, and disaster recovery planning); and

(iv) Compliance and regulation.

(e) Additional guidance on managing operational risk is provided in the

section on Trading and Business Operations.

32
 Trading and Business Operations

Trading and Business Operations Framework

A Manager should develop a comprehensive and integrated framework to manage trading

and business operations, taking into account the size and complexity of its activities, the
nature of its investment, and the requirements of its investment strategies.

The framework should include:

1. Policies and procedures which provide for appropriate checks and

balances for the significant operational and accounting controls, including:
(i) appropriate selection and management of counterparty relationships;
(ii) adequate management of cash, margin and collateral requirements; (iii)
careful selection of key service providers; (iv-v) adequate infrastructure
and operational practices; (vi) adequate operational and accounting
processes, including appropriate segregation of business operations and
portfolio management personnel; and (vii) a disaster recovery process;

2. Systems, infrastructure and automation commensurate with the scale of

the business and trading operations of the Manager, including regular
review of such infrastructure to assess operational risks in light of both
internal and external changes; and

3. A member of senior management, such as a Chief Operating Officer or

person with similar responsibilities, with responsibility for the Manager’s
business operations, supported by internal personnel or, where applicable,
external resources, with skills appropriate to the complexity of the
Manager’s business operations. This role and the operational areas of the
firm should coordinate and work in partnership with the investment
professionals and senior management.

I. Counterparties

A. Selection of Counterparties

1. Managers interact with a variety of counterparties and should exercise

reasonable due diligence in selecting the counterparties of the funds that
they manage. Typical counterparties that a fund will encounter include:

(a) Brokers;

(b) OTC derivative counterparties;

(c) Prime brokers;

33
 (d) Stock loan and repo counterparties;

(e) Banks; and

(f) Cash management counterparties.

2. When selecting counterparties, the key factors that a Manager should

consider include:

(a) Creditworthiness and identity of the specific entity;

(b) Ability to provide an appropriate level of service to the Manager in

light of the Manager’s business needs (including complexity of
products and frequency of trading), such as:

(i) Efficient and timely transaction processing, reporting, clearing

and settlement;

(ii) Financing capabilities necessary to support the Manager’s

business;

(iii) Adequate staff to be able to service the Manager’s needs,

including the support and reporting of information to prepare
books and records; and

(iv) Terms and conditions for movements of margin and cash

required by transactions.

(c) Regulatory environment in which the counterparty operates; and

(d) Stability of terms on which the counterparty is willing to provide

service to the Manager (such as term funding lock-ups for prime
brokers).

B. Relationships with Counterparties

1. The Manager should negotiate and maintain with its counterparties signed
agreements governing the terms of the relationship (e.g., account opening,
prime brokerage, stock lending, ISDA and give-up agreements).

2. The Manager should carefully review the details of the terms of these
agreements to understand risks that can affect the counterparty’s
obligation to extend credit or provide other services (such as terms that
can increase collateral requirements).

34
 3. Where multiple counterparties are used, the Manager should devote
appropriate resources to managing the operations of the fund across those
multiple counterparties.

II. Cash, Margin and Collateral Management

1. The Manager should have a framework for managing its cash balances and
processing any margin or collateral calls from its prime brokers, financing
and OTC derivative counterparties. In developing this framework,
Managers should carefully consider industry practices and developments
in this area.

2. The Manager should:

(a) Understand and monitor its compliance with credit agreements;

(b) Understand and monitor the amount of collateral required to support

positions;

(c) Verify marks used by the fund’s counterparties to value the fund’s
positions for collateral purposes; and

(d) Verify and meet margin calls in a timely manner.

III. Selection of Key Service Providers

1. The Manager should select reputable service providers that have expertise
and experience suitable to appropriately support its business. These
service providers may include, where appropriate:

(a) Providers of accounting, consulting, and proxy services, IT product

vendors, and legal counsel; and

(b) The fund’s administrator (where one exists).

2. In engaging key service providers, the Manager should enter into

agreements that clearly delineate the service levels to be provided to it.
Such services should be appropriate in light of the Manager’s internal
infrastructure and the complexity of the Manager’s operations.

3. The Manager should monitor the quality of service provided by key

service providers.

4. Responsibility for any outsourced parts of the process continues to lie with
senior management or its designees.

35
IV. Core Infrastructure and Operational Practices

1. The Manager should develop infrastructure and operational practices

tailored to its business. Requirements for the infrastructure needed will
vary depending on the types of investments, frequency of trading, and the
need for manual processing, as opposed to the availability of automated
systems.

2. The Manager should consider whether the implementation of automated

processing systems is appropriate to reduce settlement risk. Depending on
the size and complexity of the organization, automation may be
appropriate, where available.

3. The Manager should provide for appropriate reporting-up policies for

resolving material breaks, errors or other matters that could potentially
cause risk of loss to the fund. The Manager should employ business-
process monitoring, analysis and optimization techniques to identify and
address breaks and inefficiencies.

4. Depending on the size and complexity of the organization, the Manager

should endeavor to cross-train personnel or otherwise have appropriate
back-up, so that key operations functions are not dependent solely on one
individual.

A. Operational Procedures

1. The Manager should adopt procedures for clearing and settling

transactions and for wiring funds. Such procedures may address:

(a) The reconciliation of positions and cash accounts across

counterparties, such as prime brokers, futures clearing accounts, the
fund’s administrator and front office, including prompt resolution of
failed trades;

(b) An appropriate procedure for cash movements, including authorized

signatories and appropriate checks and balances;

(c) The appropriate segregation of duties between investment and

operational personnel, including confirmations that should be sent to
non-trading personnel;

(d) The use of industry utilities and software tools (such as DTCC
Deriv/Serv) in an effort to automate the Manager’s OTC derivatives
processes, where the volume and complexity of a Manager’s business
warrants it;

36
 (e) A process for addressing corporate actions, such as mandatory
elections, voluntary elections, dividends, splits and reorganizations;
and

(f) A process for monitoring and taking timely action on all positions that
have expiration dates (e.g., options, warrants, rights and conversions).

V. Additional Infrastructure and Operational Practices

1. If a Manager undertakes material trading activities in the OTC derivatives

market or other more complex markets (such as bank debt, mortgage-
backed securities, equity derivatives, structured credit trading or private
transactions), the Manager should devote the resources necessary to
maintain infrastructure, personnel and processes that are sufficiently
robust to handle the added complexities of these instruments and markets,
including working closely with counterparties and remaining informed of,
and responsive to, overall market trends. A Manager who trades in
complex products should consider the need to maintain additional systems
or to hire or engage personnel with specific skill sets necessary to
appropriately manage such complex products. The lists below represent
examples of derivative and complex product practices and are neither
exclusive nor exhaustive.

A. OTC Derivative Practices

1. The fact that OTC derivatives are individually negotiated transactions that
can have unique characteristics and terms makes them especially
challenging to manage from an operational and business perspective.
Accordingly, when trading in OTC derivatives, the Manager should
consider the need for the following:

(a) Negotiating appropriate ISDA master agreements with all of its OTC
derivatives counterparties (discussed further above in sub-section
I.B.1);

(b) Negotiating bilateral collateral agreements with its counterparties

whenever possible;

(c) Appropriate systems to record all material terms of all OTC contracts
to facilitate the appropriate pricing and risk management of these
portfolios;

(d) Processes to monitor and promptly report-up the resolution of any

derivative transaction not supported by a counterparty term sheet
detailing the economics of the trade;

37
 (e) Procedures for monitoring outstanding confirmations (e.g., not yet
received, in review, disputed, or aged) and performing risk analysis,
timely mitigation (e.g., prioritization) and expeditious resolution of
outstanding confirmations;

(f) Review of counterparty OTC margin calls and a process for assessing
when the Manager should make its own OTC margin calls to brokers,
as appropriate;

(g) Appropriate processes and procedures to facilitate the Manager’s

ability to adhere to the industry’s novation protocol and transaction
processing timelines, and other industry protocols that may develop;
and

(h) Review of final payoffs for complex derivatives.

B. Practices for Other Complex Products

1. Bank Loans – The Manager should assess whether it has the appropriate
systems and personnel to manage the extended settlement cycles and
unique features of these products. In addition, legal advice from
appropriately skilled internal or external counsel is often needed to
manage the documentation around these transactions, particularly in the
distressed arena.

2. Mortgaged Backed Securities/CMOs – The Manager should assess

whether it has appropriate systems and personnel to manage the unique
features of these products, such as processing monthly paydowns and
understanding payment waterfalls.

3. Structured Credit Trading – The Manager should assess whether it has

the appropriate systems and personnel necessary to manage the unique
features of these products, such as the financing component, waterfall
structures and correlations.

4. Private Transactions – The Manager should assess whether it has

appropriate resources such as internal and external legal, tax and
structuring expertise that is adequate to support these transactions. In
addition, custodial arrangements may be needed to provide for appropriate
safeguarding of investment positions of this type. There should be
periodic confirmation with counterparties of open positions.

5. Transactions in Foreign Markets – These types of transactions require

an understanding by personnel or service providers of local regulatory,
market and tax infrastructure and settlement conventions.

38
 C. Staffing and Resources

1. The Manager should regularly assess the appropriate level of staffing and
resources for complex or unique trading strategies from an operational and
business risk perspective and be willing to maintain that level.

VI. Core Accounting Processes

1. The Manager needs to have appropriate systems, processes, and personnel

in place, such that the trading activity of its funds and all related
contractual arrangements and agreements can be appropriately recorded
from an accounting perspective to allow for the calculation of both fund-
level and investor-level net NAVs, as well as the production of other
important financial data that is necessary to meet investor, risk, financial
statement and tax reporting requirements. In this regard:

(a) The Manager should have internal or external personnel with an

appropriate level of accounting knowledge and experience;

(b) The Manager should have access to systems appropriate to the needs
and complexities of the firm, capable of correctly recording the trading
and non-trading activities of the funds from an accounting perspective.
These may include:

(i) Systems that maintain important trading-related data, including

quantity, cost-basis, market-value, realized and unrealized
trading gains/losses, interest and dividends, and trading-related
fees and expenses;

(ii) A general ledger that includes trading data (whether in detailed

or summarized form), as well as non-trading-related data, such
as management fees and expenses;

(iii) An allocation process that allocates the fund level results to

individual investors to allow for reporting at the investor level;
and

(iv) Processes (in addition to the valuation processes discussed

above in the section on Valuation) to ensure that all non-trading-
related activities are appropriately recorded from an accounting
perspective, including management fees, incentive fee (or
allocation) arrangements and other fees and expenses, as
outlined in the fund’s organizational documents.

(c) The Manager should implement a month-end close process (or if not
monthly, then at least as often as required by the fund’s organizational

39
 documents). Some processes that may be appropriate in light of the
characteristics of the fund include:

(i) Verification that any material valuation adjustment is

appropriately recorded;

(ii) Verification that all non-trading-related activity is appropriately

recorded;

(iii) Allocation of the fund level NAVs to individual investors; and

(iv) Preparation and distribution to investors of statements that detail

their current NAV and other related financial data.

(d) The Manager should implement an annual process to produce its

annual financial statements and related footnotes, which will be
audited by the fund’s independent accounting firm;

(e) The Manager should implement an annual process to produce investor

level tax information, as needed by investors, in accordance with the
regulations promulgated by the relevant taxing authority; and

(f) The Manager should periodically assess its operational controls in

light of the changing needs of its business, particularly where there
have been changes to the activities of the organization.

2. Responsibility for any outsourced parts of the process continues to lie with
the senior management or its designees.

VII. Disaster Recovery/Business Continuity

1. To mitigate financial loss in the event of disaster or other business

disruption, the Manager should establish a comprehensive Business
Continuity/Disaster Recovery plan. The Plan should include a business
impact analysis to identify and prioritize critical processes for the
Manager. It should also clearly articulate business recovery and
resumption objectives. This plan may include written procedures and
documentation, test plans and test scenarios as well as other procedures for
addressing unforeseen events in an emergency.

40
 2. Business continuity planning should cover all operational business
functions and should not be limited to technology-based disaster recovery
plans.8

8
Additional guidance on the development of disaster recovery/business continuity planning is
provided in the Managed Funds Association’s 2007 Sound Practices for Hedge Fund
Managers.

41
 Compliance, Conflicts and Business Practices

Compliance, Conflicts and Business Practices Framework

A Manager should establish a comprehensive and integrated compliance and business

practices framework that is supported by adequate resources. The goal of the framework
is to provide guidance to the Manager and its personnel in respect of ethical, regulatory
compliance and conflict of interest situations. Critical to the success of the framework is
a strong culture of compliance.

The framework should include:

1. A written code of ethics that establishes principles governing the conduct

of the Manager’s personnel;

2. A written compliance manual that addresses (i) the various rules and
regulations governing the Manager’s operations; (ii) potential conflicts of
interest that may arise in the course of those operations; and (iii) the
maintenance and preservation of adequate records;

3. The establishment of a Conflicts Committee to review conflicts;

4. Regular training of personnel on the material elements of the compliance

program; and

5. A compliance function that includes (i) a Chief Compliance Officer to

monitor and maintain the Manager’s compliance program; (ii) appropriate
discipline and sanctions to address departures from the Manager’s
compliance program; and (iii) an annual review of the Manager’s
compliance program.

I. Culture of Compliance

1. Critical to the success of the compliance and business practices framework

is a culture of compliance, grounded in the commitment and active
involvement of the most senior leaders of the firm and fostered throughout
the organization.

2. Particularly important to creating a culture of compliance are the

following:

(a) Encouragement by senior management to personnel to raise any

concerns or questions (facilitated by an environment that is free from
fear of retribution);

(b) Ability to communicate concerns to senior management;

42
 (c) Active participation by senior management in compliance meetings
and training sessions;

(d) The role of the Chief Compliance Officer (or other person with similar
responsibilities) should be regarded as institutionally significant; and

(e) Senior management should consult regularly and encourage employees

to consult regularly with the Chief Compliance Officer and his or her
delegates whenever issues arise that could raise compliance issues.

3. Maintaining high ethical standards of integrity in the Manager’s business

must be the responsibility of senior management and each employee.

II. Code of Ethics

1. The Manager should develop and adopt a written code of ethics that
establishes guidelines that are designed to foster integrity and
professionalism among the Manager and its personnel. Whether particular
policies or subjects are addressed in the code of ethics or compliance
manual (discussed further below in sub-section III) should be determined
by the Manager taking into account what it believes is most effective for
its business.

2. These guidelines should address, at a minimum, the following issues, to

the extent relevant to the Manager’s structure and operations:

(a) Standards of conduct that require fund personnel to operate with

integrity and professionalism;

(b) The fiduciary capacity of the Manager and its personnel (including the
priority of the interests of the fund and its investors over the interests
of the Manager and its personnel);

(c) Protection of confidential information about the fund and its investors
and any such information received by the Manager from third parties;

(d) Personal trading by fund personnel;

(e) The receipt or provision of gifts and entertainment;

(f) A review or approval process for considering the compatibility of

personnel’s internal role with outside directorships and other business
interests;

(g) An internal reporting mechanism for conduct inconsistent with the

code of ethics; and

43
 (h) Other policies that the Manager considers appropriate given its
particular characteristics and operations.

3. The code of ethics should clearly identify the persons subject to it.

4. The code of ethics should reflect the nature of the Manager’s business.
While “off the shelf” codes or manuals may provide useful background
and guidance, the code should be appropriately adapted to fit the
Manager’s business.

5. Employees should certify that they have read the code of ethics and
undertake to behave in conformity with it.

III. Compliance Manual

A. General Elements of the Compliance Manual

1. The Manager should evaluate the critical elements to be addressed in its

compliance manual in light of the focus of its business and operations.

2. The Manager should develop a written compliance manual that outlines its
policies and procedures for complying with laws, rules and regulations
(domestic or international) applicable to the fund’s business operations
and trading activities.

3. The following are topics that a Manager should consider addressing in its
compliance manual (to the extent relevant):

(a) Marketing and Communication:

(i) Procedures for communicating with third parties (including

media communications);

(ii) Procedures for using third-party marketers to solicit investments,

where this practice is permitted; and

(iii) Procedures for review of any marketing materials used by the

Manager, including review of performance presentation
standards.

(b) Anti-Money Laundering:9

9
Additional guidance is provided in Appendix IV of the Managed Funds Association’s 2007
Sound Practices for Hedge Fund Managers.

44
 (i) Anti-money laundering policies and procedures and compliance
with the Bank Secrecy Act, as applicable, such as:

● Procedures for identifying investors prior to subscription and

periodic review of the fund’s investor base; and

● Where anti-money laundering compliance is delegated to an

administrator or other third party, periodic review of the
delegate’s practices (including its consistent application of
those practices).

(c) Trading and Business Practices:

(i) A procedure for the prompt and accurate recording of

transactions;

(ii) Trade allocation policies, such as policies in respect of

allocations among funds and managed accounts or proprietary
accounts, where applicable;

(iii) A procedure for proxy voting;

(iv) A trade error policy;

(v) A best execution policy that includes selection criteria for

executing brokers, and provides for identification and review of
such criteria by a best execution committee (where applicable)
or by senior management;

(vi) A policy for the use of soft-dollar arrangements and bundled

commissions that may include:

● Review of the Manager’s use of soft dollars for consistency

with the practices outlined in disclosure to investors or
compliance with Section 28(e) of the Securities Exchange
Act of 1934 (where applicable); and

● Heightened review of transactions with affiliated broker-

dealers (where applicable) to monitor that the use of soft
dollars is consistent with what has been disclosed to
investors.

(vii) Policies prohibiting manipulation, such as:

● Prohibition of late trading or market-timing;

● Prohibition of front-running;

45
 ● Prohibition of spreading of false rumors and wash sales, as
appropriate in light of the Manager’s business;

● Procedures for hedging and short sales in connection with

offerings of securities (such as in connection with PIPE
transactions); and

● Procedures for participating in new issuances of securities

and complying with representations to brokers regarding
eligibility for such issuances.

(viii) Policies and procedures to prevent, detect, and address the

misuse of material non-public information and insider trading
(including in respect of price- or market-sensitive information
and confidential information obtained from brokers, consultants
or other third parties), which may include the use of information
barriers, restricted lists or other appropriate procedures;

(ix) Policies and procedures designed to prevent obtaining material

non-public information while conducting research and
information gathering when investing in public companies;

(x) Policies and procedures for personal trading by personnel of the

Manager, such as identifying Manager personnel subject to
restrictions and establishing appropriate procedures to control
that trading (e.g., mandatory pre-approval or clearance of certain
transactions and investments in initial public offerings or private
placements, prohibition of or restriction on trading certain types
of investments, restricted lists, black-out periods and holding
periods); and

(xi) Policy on compliance with securities law ownership reporting

requirements, such as the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, Sections 13 and 16 of the Securities
Exchange Act of 1934, and comparable non-U.S. reporting
requirements.

(d) Surveillance:

(i) The Manager should establish a system to monitor compliance

with its compliance policies and procedures; and

(ii) Appropriate surveillance will vary with the nature of the

Manager’s activities and the characteristics of the fund, but
should include review of records or other documentation

46
 produced in the ordinary course of business that can be useful in
assessing the Manager’s compliance with its policies.

B. Recordkeeping

1. Business records that are important to the Manager and fund should be
maintained. Examples include contracts, constituent documents, trade
data, accounting records, documents relating to valuation, records of
meetings of any principal committees (such as the Risk, Valuation, and
Conflicts Committee), investor communications and correspondence. The
Manager should establish policies and procedures for the creation,
maintenance and retention of business records that are appropriate to its
size and level of activity. These policies and procedures should focus on
key business records and should address, where applicable:

(a) The duration of retention, which may vary by type of record;

(b) The manner of retention, which should protect against unauthorized

alteration or untimely destruction;

(c) Communication of the retention policy to all employees as it applies to

them;

(d) Accurate and complete recording of trading activities; and

(e) Methods to access documents retained pursuant to the policy.

C. Conflicts of Interest

1. Conflicts are inherent in the asset management business as in many other

financial services businesses. The key to appropriately handling conflicts
is to have a process in place for identifying them and addressing them.
The types of conflicts that may exist in a Manager’s business will vary
based on its structure, the structure of its funds and the types of activities
that it conducts.

2. The following are types of potential conflicts that may be applicable to a

particular fund and that a Manager should consider in light of its business:

(a) Conflicts between the Manager and its fund(s), such as:

(i) Conflicts arising from proprietary trading or proprietary holdings

in specified investments;

(ii) Conflicts arising from the valuation process;

47
 (iii) Conflicts relating to the allocation of costs and expenses
between the Manager and the fund;

(iv) Conflicts relating to transactions or business arrangements with

affiliates, such as brokerage arrangements, cross-trades,
principal trades and the provision of any other services by
affiliates; and

(v) Conflicts relating to relationships with third-party service

providers (e.g., prime and other brokers, vendors and
administrators), such as the use of soft dollars, capital
introduction and consulting services.

(b) Conflicts between funds managed by the same Manager or between

funds and separate accounts managed by the same Manager (e.g.,
conflicts in the allocation of investment opportunities);

(c) Conflicts between employees (including family members) of the

Manager and the fund, such as:

(i) Conflicts arising from personal trading (including front-

running);

(ii) Conflicts arising from private investment activities;

(iii) Conflicts arising from outside business activities; and

(iv) Conflicts arising from the receipt or provision of gifts and

entertainment.

(d) Conflicts between investors, such as conflicts arising from side letters
or parallel managed accounts that may grant preferential terms to
certain investors or adversely impact others.

3. The Manager should adopt policies and procedures to identify and address
potential conflicts of interest that may arise in its specific businesses.
Whenever a conflict can be mitigated or addressed in a consistent and
standardized way (such as in relation to personal trading policies), the
Manager should adopt policies and procedures to deal with that conflict.
Recognizing that circumstances may require a review of specific facts and
that not all potential conflicts can be predicted, the Manager should also
establish a Conflicts Committee.

(a) The purpose of the Committee would be to assess new or potential

conflicts, as they arise, that have not previously been addressed.

48
 (b) The Committee should also determine whether amendments or new
policies are necessary or appropriate in light of its review.

(c) The Committee may include the Manager’s Chief Compliance Officer
and other members of senior management (as appropriate to the
internal organization of the fund).

(d) The Committee should review at least annually the effectiveness of the
Manager’s conflict management process.

(e) The Committee should keep appropriate records of how material

conflicts were addressed.

D. Training and Educating Manager’s Personnel

1. The Manager should establish a robust training program to educate

personnel in respect of its compliance program. This training program
should be developed in light of the following considerations (to the extent
relevant):

(a) Training should foster an understanding of all parts of the compliance

framework;

(b) Training should be tailored to the type of business undertaken by the

Manager and should incorporate examples relevant to that business. It
should focus on identifying compliance issues particular to the
Manager’s operations and on preventing market abuse;

(c) At least annually the Manager should organize and make available to
personnel performing a significant business function a compliance
training session addressing topics identified by the Chief Compliance
Officer and by employees as relevant to the activities of such
employees. The Manager may enlist the services of outside experts,
such as outside counsel, to conduct these sessions;

(d) Training should address circumstances where it would be appropriate

to seek guidance from the Chief Compliance Officer or other member
of senior management regarding a compliance matter; and

(e) Because junior personnel will often develop greater compliance

awareness through open and informal discussions with their
supervisors and the Chief Compliance Officer, such contact should be
encouraged as part of the training process.

49
IV. Compliance Function

1. The Manager should establish and devote adequate resources to a

compliance function to oversee, implement and review the Manager’s
compliance program.

A. Chief Compliance Officer

1. A Chief Compliance Officer or other member of senior management (as

appropriate to the size, complexity and resources of the Manager), with
sufficient knowledge and experience, should be appointed to oversee the
Manager’s compliance program.

(a) The Chief Compliance Officer’s duties may include:

(i) Identifying compliance risks (in consultation with other senior

personnel);

(ii) Monitoring compliance with policies and procedures;

(iii) Conducting an annual review and assessment of the Manager’s

compliance framework (including the compliance manual); and

(iv) Providing for staff awareness of the Manager’s compliance

policies and procedures through training and other methods
appropriate for the Manager’s business.

(b) The Chief Compliance Officer should have adequate resources to seek
the advice of external experts on compliance matters when needed.
This may be especially important where the Manager operates in
international markets outside the location of the Manager.

(c) The Chief Compliance Officer should be able to devote sufficient time
to the performance of his or her functions.

(d) Employees should report all compliance matters to the Chief

Compliance Officer or other designated staff.

2. In addition to a Chief Compliance Officer, other members of senior

management may be appointed to oversee compliance in specific areas.

B. Discipline and Sanctions

1. Non-compliance with the policies or procedures described in the various

parts of the compliance framework should be reviewed and handled
promptly and conclusively. To this end, policies and procedures may
provide for the following:

50
 (a) Non-compliance with the code of ethics or compliance manual should
be internally reported to the Chief Compliance Officer according to the
reporting procedures stated in these documents.

(b) Disciplinary responsibility generally lies with senior management.

Accordingly, the Chief Compliance Officer should have access to and
report to senior management and should recommend appropriate
disciplinary action to senior management;

(i) The Chief Compliance Officer or General Counsel should

conduct an internal review of allegations or evidence of
wrongdoing, as necessary; and

(ii) A range of sanctions may be appropriate for non-compliance,

such as (depending on the severity of the infraction and an
employee’s compliance history) reprimands, censure,
suspension, termination and, where applicable and practical,
restitution and disgorgement of profits.

C. Annual Compliance Review

1. The Manager’s compliance framework, including compliance policies and

procedures, should be reviewed at least annually to assess its
effectiveness. A more frequent review of aspects of the compliance
framework is appropriate upon the occurrence of events that necessitate
more immediate changes. Each component of the compliance framework
should be reviewed by the Chief Compliance Officer in light of significant
changes and factors relevant to the Manager’s business, such as:

(a) Legislative and regulatory developments;

(b) Changes in business practices;

(c) Variations in the Manager’s strategies and products;

(d) The growth of the Manager’s business; and

(e) Employee conduct.

51