(Pix © Larry Catá Backer 2016)
Despite their sometime vocal protestations to the contrary, sovereign wealth funds, and the states that use them, have increasingly sought to leverage their financial power to develop strong and interconnected governance frameworks within the areas in which they are most active--corporate governance, standards of investing and the management of market integrity (here, here and here). Sovereign wealth funds have started to act as development funds (eg here, and here) and as the institution through which public international law and normative standards are domesticated within the societal sphere (eg here). This is accomplished not through the usual levers of the state, but through the exercise of market power in private economic activity (eg here). Private economic power has been separated from the public exercise of regulatory authority by states (eg here).
Since the development of the Santiago Principles, powerful SWFs have also sought to act collectively, first through the International Working Group of Sovereign Wealth Funds (IWGSWF) and currently through the International Forum of Sovereign Wealth Funds (IFSWF). Their initial objective was to manage popular opinion, and to protect their power to project public wealth into private markets. To that end they sought to develop an ethos of private-in-public activity; that they would participate in markets like other private market participants, and for roughly the same objectives--leaving policitcs to public bodies. But not. . . it seems. . . leaving regulatory governance to the public sector as well.
Now it appears that SWFs, through the the IFSWF, has started to flex their collective muscles to effect regulatory engagement in private markets on a global level in coordination with other but this time private collective market actors. IFSWF is reported to have signed an agreement with a the Hedge Fund Standards Board, to change governance standards in the alternative investment industry. What makes this agreement noteworthy is its regulatory effect: an international organization of SWFs has entered into an agreement with a private standard setting organization to refine the regulation of a portion of the securities markets ostensibly to better protect the integrity of markets.
The news story describing the transaction, the IFSWF press release and my brief comments follow.
State projections of internationalized law making has generally been focused on changing the normative basis for corporate governance, or for embedding notions of corporate social responsibility within the calculus of corporate activity in global production chains. And these objectives have devolved on the individual SWF--Norway, Singapore, China and Russia each pursue their own national interests through the frameworks within which they project national power in private markets.
Recently, however, SWFs have begun to assert greater collective authority. This is particularly important in an area once reserved almost exclusively to states--the protection of the integrity of markets. This objective--central to the so-called neo-liberal globalized economic order--currently serves as the core regulatory obligation of states that have adopted a markets based approach to macro-economic policy. And yet, increasingly, it appears states are now aggregating their private power to develop systems of private governance the object of which is to preserve the integrity of markets for financial instruments. This is a profoundly interesting turn in the nature of SWF behaviors within markets. Indeed, the suggestion--and only a suggestion at this point--points to the possibility of a larger role for public institutions in private markets, including regulatory roles in private markets, through the assertion of private rather than public power. The object is traditionally public yet the approach is now inherently private in form.
More importantly, perhaps, is the establishment of at least rudimentary institutional forms that will make it easier to coordinate policy and create coherent approaches to the development of governance standards and expectations. In effect, the two bodies, together, will begin to better coordinate their policy functions, and perhaps, their norm making as well. If organizations representing hedge fund managers and organizations representing SWFs can align their secretariats, these private actions may well produce greater effects in public sector approaches to regulation--and especially the regulation of markets. This movement toward the construction of public-private quasi policy regulatory bodies follows roughly a model introduced by the G-20 in the form of the Financial Stability Board (eg here) and is worth watching.
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International Forum of Sovereign Wealth Funds (IFSWF) and Hedge Fund Standards Board (HFSB) establish Mutual Observer relationship
Apr 4, 2016
The International Forum of Sovereign Wealth Funds (IFSWF), a global network of sovereign wealth funds, and the Hedge Fund Standards Board (HFSB), the standard-setting body for the hedge fund industry, have established a Mutual Observer relationship.
The IFSWF is a global network of sovereign wealth funds (SWFs) established in 2009 to enhance collaboration, promote a deeper understanding of SWF activity and raise the industry standard for best practice and governance. Its 31 member funds collectively have about US$ 5.5 trillion under management, representing 80% of assets managed by sovereign funds globally.
The HFSB was established in 2008 and is custodian of the Hedge Fund Standards. The HFSB brings together managers and investors from around the world to set standards for how the hedge fund industry should operate. It is supported by more than 120 hedge fund managers with over US$ 800 billion in aggregate assets and by more than 60 leading institutional investors with aggregate assets of over US$ 2 trillion.
The Mutual Observer relationship will help ensure that SWFs are active participants in HFSB activities and in the standard setting process. Likewise, the relationship enables the HFSB to offer insights and information to the SWF community on hedge fund industry issues. The Mutual Observer role will enable the IFSWF and HFSB to:--Participate in each other’s events through attendance and speaking roles;
--Organise and co-host seminars that bring together the IFSWF and HFSB memberships to discuss topics of mutual interest and relevance;
--Foster a constructive dialogue between hedge fund managers and SWFs and align their interests;
--Collaborate on issues of mutual interest, including governance, transparency and financial stability; and
--Make the HFSB’s resources including its Standards and Toolbox more accessible to the SWF community and invite SWFs to take an active part in the HFSB process.
Adrian Orr, IFSWF Chair, and Chief Executive Officer of the New Zealand Superfund, said: “We are delighted to form a closer relationship with the HFSB to share knowledge and experience with the objective to raise Standards in the financial industry. This relationship will help ensure that sovereign wealth funds have a voice in the hedge fund standard setting process.”
Dame Amelia Fawcett, Chairman of the HFSB, said: “The interests of the HFSB and IFSWF are very much aligned, particularly in the areas of transparency, good governance and financial stability. The HFSB relies on hedge fund managers and investors to work together to set industry standards, and we welcome closer dialogue with sovereign wealth funds, which are a large and influential hedge fund investor group.”
Both the HFSB and the IFSWF maintain strong links with official stakeholders and regulatory bodies globally. The HFSB was granted affiliate membership in the International Organization of Securities Commissions (IOSCO) in 2014; the IFSWF was established under the auspices of the International Monetary Fund (IMF) in 2009.
Hedge funds have been an important component in many SWF portfolios, and a number of SWFs such as the GIC and the Future Fund of Australia have been long standing supporters of, and active participants in the work of both the HFSB and the IFSWF.
David George, HFSB Trustee, and Head of Debt and Alternatives for the Future Fund of Australia, said: “The Future Fund works towards reshaping the investment model to prioritise the interests of the asset owners, and ultimate end-beneficiaries. The Future Fund supports the HFSB and the IFSWF which provide platforms to foster constructive dialogue within the SWF community and between hedge fund managers and asset owners and we look forward to helping shape the joint initiatives between the HFSB and the IFSWF.”
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Sovereign wealth funds push for higher hedge fund standards
Chris Flood
Financial Times
3 April 2016
The International Forum of Sovereign Wealth Funds has signed an agreement with a large hedge fund association to push for better governance standards in the alternative investment industry.
The agreement is aimed at tackling issues in the hedge fund industry that have long concerned institutional investors, such as a lack of transparency around funds’ liquidity terms in stressed market conditions.
Many large investors, including sovereign wealth funds, were angered during the financial crisis when hedge funds imposed “gates” on their clients, preventing investors from pulling money out.
Alex Millar, head of sovereigns for Europe, the Middle East and Africa at Invesco Asset Management, the US fund house, said: “Some hedge fund investments turned out to be less liquid than expected. There was a discrepancy between the risks taken and the risks that were anticipated.”
The poor performance of many hedge funds since the financial crisis and their high fees remain sources of frustration among institutional investors.
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To improve the relationship between sovereign funds and their hedge fund clients, the IFSWF has established a “mutual observer” agreement with the Hedge Fund Standards Board, an association that works with 120 hedge fund managers that collectively manage $800bn in assets.
Adrian Orr, chief executive of the New Zealand Superfund and chairman of the IFSWF, which represents a third of the world’s 90 sovereign funds, said: “This relationship will help ensure that sovereign wealth funds have a voice in the hedge fund standard-setting process.”
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