The International Organization of Securities Commissions (IOSCO) has published a new set of standards aimed at increasing the protection of investors in funds of hedge funds. The report focuses on the methods by which funds of hedge funds' managers deal with liquidity risk and the due diligence processes used by funds of hedge funds' managers prior to and during each investment.

The new report states that fund of hedge funds' managers should manage liquidity risks by, among other things: (i) making reasonable inquiries to be in a position to consider if the fund of hedge funds' liquidity is consistent with that of the underlying hedge funds, particularly in order to meet redemptions; (ii) prior to investing, and during the investments' lifetime, considering the liquidity of the types of the financial instruments held by the underlying hedge funds and (iii) before and during any investment, considering whether conflicts of interest may arise between any underlying hedge fund and any other relevant parties.

In addition, the new report suggests that fund of hedge funds' managers undergo a number of due diligence processes prior to any investment being entered into and on a continuous basis following the commitment, including: (i) establishing and implementing appropriate due diligence procedures for the purpose of investment into hedge funds, which are reviewed regularly; (ii) assessing the specific legal and regulatory requirements applicable in the hedge fund's jurisdiction; (iii) carrying out appropriate due diligence on the underlying hedge fund whenever it is considered necessary; (iv) regularly assessing if selection procedures for eligible underlying hedge funds have been properly met, or not met, and to explain any deviations and (v) maintaining adequate resources, procedures and organizational structures necessary for the purpose of carrying out a proper and robust due diligence.

IOSCO report: available here

Press Release: IOSCO Publishes Regulatory Standards for Funds of Hedge Funds (Sept. 14, 2009)

Story: IOSCO Publishes New Funds of Hedge Fund Standards, FINalternatives (Sept. 14, 2009)