Corgentum Blog : Hedge Fund Operational Due Diligence - Part 3

Hedge Fund Social Media – Compliance and Investigative Due Diligence Considerations

Hedge funds are increasingly focused on establishing their presence on the Internet and via social media. This is in stark contrast to several years ago, when many hedge funds did not maintain a website at all, or only very limited websites. Although still limited in certain circumstances, today many hedge funds maintain websites with content that is frequently updated whether it be for investors only (through secured access) or more open content for prospects, such as general market commentary. Echoing this point a recent study outlined that 91% of the 100 largest hedge funds now maintain websites. Similarly, the study also found that hedge funds are increasingly active on social media via popular avenues such LinkedIn and Twitter.

The Compliance Implications of Increased Hedge Fund Social Media

Fueling the hedge fund interest in social media has been the increased relaxing of hedge fund marketing restrictions via the passage of regulations such as the US JOBS Act. social media Hedge Fund Social Media   Compliance and Investigative Due Diligence ConsiderationsWith the removal of many social media regulatory roadblocks, hedge funds have continued to broaden their outreach to investors via the web and social media to reach investors. Many activist hedge funds have also utilized social media to increasingly promote their opinions on certain investments as well. Furthermore, some funds have sought to minimize any potentially negative items news and social media through more pro-active approaches to managing their digital reputations.

Among regulators, the US SEC in particular has focused on the activity of investment advisers on social media. Dating back several years the early efforts of the SEC in this areas were apparent. For example, in January 2012 the SEC issued a National Examination Alert on the use of social media. At the same time, in January 2012 the SEC charged a Illinois based adviser in a social media scam. The SEC has also issued investor alerts regarding avoiding fraud relating to funds use of social media.

In addition to offering hedge funds the benefits of being able to further their outreach to prospective investors, the SEC has also acknowledged the potential due diligence benefits associated with hedge fund social media. In an Investment Management Guidance Update from March 2014 the Division of Investment Management of the SEC stated, “We recognize that social media has facilitated consumers’ ability to research and conduct their own due diligence on current or prospective service media marketing Hedge Fund Social Media   Compliance and Investigative Due Diligence Considerations

Organizations such as the Financial Industry Regulatory Authority (FINRA) have also adapted their regulatory approach to focus on social media. In 2013 for example, FINRA outlined so-called spot-check rules to promote regulatory oversight, and ostensible transparency, of hedge fund advertising and activities on the web and social media including blogs. Now in 2015, the SEC is catching up, proposing rules which would require fund managers to go so far as disclose a list of their social media accounts on their Form ADV filings.

Outside of the US, the UK Financial Conduct Authority (FCA) published guidelines in March 2015 on fund manager use of social media. In a press release announcing the new guidance, Tracey McDermott, FCA Director of Supervision and Authorizations commented:

Social media is already an important tool for industry to engage with customers and its use is only likely to grow.  Financial promotions, whether on social media or traditional media, must give customers the right information and meet our requirements to be fair, clear and not misleading. We have had extensive industry feedback during our consultation. We believe this guidance reflects a sensible approach that  allows the industry to innovate using new forms of media and at the same time ensures customers get the right level of protection.

Are Investors Analyzing The Risks of Increased Hedge Fund Social Media During Investigative Due Diligence?

With global enhanced compliance scrutiny of hedge fund activities on the web and for social media in particular, it is worth considering whether investors are appropriately incorporating reviews of social media into their overall due diligence process. Unfortunately, many investigative due diligence reviews tend to ignore, or minimize, social media searches during the background investigation process.

Often times a review of any social media accounts associated with either the fund management company or any key fund personnel may provide useful investigative due diligence insights. For example, a hedge fund Chief Operating Officer’s (COO) LinkedIn profile may reveal certain biographical details that are not fully fleshed out in an, “official” biography provided by the firm.twittertrading 616 195x130 Hedge Fund Social Media   Compliance and Investigative Due Diligence Considerations

Continuing our example, as an investor seeking to make an informed investment decision, it would be considered prudent to understand the chronological details of a COO’s educational and professional history. Such information can for example help to determine extended gaps in employment or provide guidance into other positions held that the COO may wish to omit for any number of reasons. When such gaps or omissions are present an investor may be able to turn to social media to gather additional data points in this area. Similarly, analyzing social media feeds such as Twitter and blogs may also provide valuable investigative data in understanding potential reputational risks associated with a hedge fund or key personnel.


When you combine the investigative due diligence benefits of analyzing social media during the due diligence process, with the potential enhanced compliance disclosures and associated risks now surrounding a hedge funds potential use of social media, it builds an increasingly strong argument that pro-actively analyzing social media is prudent.

Corgentum works with investors to analyze hedge fund social media as part of our investigative and operational due diligence review process. Contact us today to learn more about how we may be able to enhance your current due diligence process by incorporating deep-dive reviews of evolving operational risk areas such as social media.

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A Governance Reversal? – Cayman Appeals Court Weavering Decision Turns Good Governance Bad

The Cayman islands was doing so well lately in refurbishing its image.  With the recent Cayman Islands Corporate Governance Survey, and director licensing initiatives it looked as though investors were finally about to have some real form of director oversight, and perhaps dare we say it even material accountability? A Governance Reversal?   Cayman Appeals Court Weavering Decision Turns Good Governance Bad

Well it seems this was too good to be true. At least that’s what’s the Cayman Islands court system effectively stated with its most recent decision in the Weavering case. As a quick recap, in this case two directors of the Weavering Macro Fixed Income Fund were originally determined by a Cayman Court to have been negligent in the oversight of the fund.

This was a problem for the directors because the fund was later found to effectively be fraud, and the firm’s founder Magnus Peterson was recently sentenced to 13 years in jail. Furthermore, by being found negligent the directors were on the hook for a judgment of approximately $100 million USD.

As expected, they appealed the ruling and the Cayman Court agreed with them. Without delving too much into the legal technicalities in this case (i.e. – what constitutes willful negligence versus default), one thing is clear from this decision – this latest development in the case represents a major step backwards for hedge fund governance. A Governance Reversal?   Cayman Appeals Court Weavering Decision Turns Good Governance Bad

Aren’t Directors Protected By Indemnification Clauses?

To be clear, issues of negligence and associated terms, in particular willful negligence as it applies to the directors in the Weavering case, are related to the broader area of director indemnification.

Despite minor difference in indemnification standards among different jurisdictions, the standard of negligence is effectively set by the hedge fund themselves in their offering documents. An indemnification at a standard of “willful negligence” is quite common in the hedge fund industry.  However, in this case the Cayman Court of Appeals disagreed with the UK Court, which found the directors to be negligent. Further deviations the interpretation of the standard of terms such as willful negligence between jurisdictions will likely further develop going forward only complicating the issue even more.

Practically, this most recent Cayman Court decision effectively outlines that the directors of Weavering were not “willfully negligent.” Therefore, it is perhaps even more concerning that this sets a legal precedent for not only Cayman funds, but also potentially sets the evidentiary bar quite high to show a case of actual negligence for funds outside of the Caymans.

From the perspective of investors it further widens the gap between the promise of what directors should be doing to implement rigorous fund oversight and the realities of their lack of liability for failing to do so.Grand Court A Governance Reversal?   Cayman Appeals Court Weavering Decision Turns Good Governance Bad

Interestingly in an interview for his new book, Hedge Fund Governance: Evaluating Oversight, Independence and Conflicts (Academic Press, 2014), Corgentum Consulting Managing Partner, Jason Scharfman, interviewed a representative of the Cayman Islands Monetary Authority (CIMA) about the impact on governance and director liability of the Weavering decision before it was overturned.

While CIMA indicated that they would effectively be responsible for monitoring direct competence and capabilities under the licensing laws. They also stressed the importance of investors conducting their own extensive due diligence into fund directors liabilities, potential conflicts and the actual level of oversight and authority in place. Clearly with this decision the Cayman Court of Appeals is echoing CIMA’s sentiment that investors, not the financial regulators or courts, are the ones who will be financial penalized for conducting insufficient upfront and ongoing due diligence on fund governance issues and directors.

Would AIFMD Have Saved the Day?

What about new AIFMD laws would they have helped in this case to prevent a future escape from liability? Unfortunately, a depositary under AIFMD would not necessarily have been held liable for Weavering losses, as depositaries in general do not take on strict liability for assessing the risks of Alternative Investment Managers (“AIFs”). Complicating matters even further would be issues of shared liability in situations where there may be multiple appointed depositaries. This is an example of the reasons investors should be conscious of these potential gaps in liability when designing their due diligence programs to include a review of the role of depositaries.

What About The Other Service Providers Besides Directors?

Due to the fact that directors effectively delegate a majority of their day to day oversight of a fund to both the fund managers themselves and other service providers such as auditors and administrators, there is enough liability to go around.

 A Governance Reversal?   Cayman Appeals Court Weavering Decision Turns Good Governance Bad

Unfortunately, cases like these demonstrate that there is a bit of a game of hot potato that goes on where everyone passes the responsibility for liability from one service provider (i.e. – the directors) to another (i.e. – the auditors or administrators). With each service provider pointing the finger at each other it can be sometimes difficult to assign exact liability and investors are unfortunately often left unable to recoup their losses from service providers.


Evaluating the governance structures in place at hedge funds is an ongoing challenge. Simply analyzing the role of the directors is not enough. Rather than limit our focus to a single area, as part of Corgentum’s operational due diligence research, we

partner with investors to assist in evaluating the overall governance risk and control frameworks in place throughout the entire fund complex.

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