On Friday, two private-sector committees formed by the President’s Working Group on Financial Markets (PWG) in September 2007, the Asset Managers’ Committee and the Investors’ Committee, released final versions of their reports regarding best practices for hedge fund managers and investors. The committees were directed to develop best practices using the PWG’s “Agreement Among PWG and U.S. Agency Principals on Principles and Guidelines Regarding Private Pools of Capital,” which was released by the PWG in February 2007. The best practices reports are aimed at increasing accountability for industry participants, reducing systemic risk and fostering investor protection. Nothing in these reports is binding on market participants, but policymakers are expected to subject hedge funds to increased scrutiny and these best practices may inform the debate on future legislation.

The report from the Asset Manager’s Committee supersedes a draft report issued last April, but still calls on hedge fund managers to adopt comprehensive best practices in all areas, with emphasis on disclosure, asset valuation, risk management, business operations and compliance. The disclosure recommendations borrow from the public company model and call for disclosing annual audited financial statements, periodic performance updates and timely disclosure of significant events. On valuation, the report recommends establishing clear, consistent valuations of all investment positions in the funds portfolio, while minimizing potential conflicts through the creation of an independent valuation committee.

The report of the Investors’ Committee also supersedes a draft report issued last April. The final report focuses on the responsibilities of individual investors to evaluate the appropriateness of hedge fund investment, and includes a Fiduciary Guide, which addresses whether hedge funds should be a component of fiduciary investment portfolios. Among other things, investors and fiduciaries are urged to consider the fees, the valuation procedures employed, the tax and accounting consequences, any liquidity and redemption concerns, the amount of leverage the fund utilizes and the personnel and management at the fund.