This guide provides a summary of the attributes to look for when appointing directors to the board of investment funds. It also raises a number of questions to ask when deciding on board composition for a hedge fund. Hedge fund governance should be an area of focus by investors as it is important that those tasked with overseeing the activities of the fund structure are suitably qualified, experienced and add real value to the board of the investment fund.

1. Independent Fund Directors
Bell Rock Fund Governance Series February 2019
Appointing Independent Directors – Hedge Funds
David Lloyd, Managing Director of Bell Rock Group, advises on the questions to ask and what qualities to look
for when selecting independent directors to the board of investment funds.
One of the initial considerations when looking for an independent director is the underlying reason behind
your search. Given the hedge fund and corporate collapses in recent years, reasons may include: the desire
for effective corporate governance, investor demands for greater transparency and regulatory focus on
avoiding conflicts of interest. In today’s environment, corporate governance is no longer a luxury, but a
necessity, and often a requirement.
Regulators are increasing their scrutiny and investors are demanding it. Investor due diligence has increased
substantially over recent years, so expect investors to focus on the quality of the board overseeing the
operational activities of the fund and those charged with mitigating the operational risk of their investment.
The Cayman Islands has also witnessed fundamental changes to new laws and regulations so having directors

2. who are on the ground and able to understand first-hand the impact of new regulations affecting a fund is
very beneficial, if not necessary.
Since the market crisis, Maddoff, Weavering and numerous other scandals brought offshore fund directors
into the limelight. Some director firms adopted a model of rubber-stamping directors who reduced fees in
order to cross-sell other services such as fund administration, legal services, compliance etc. This race to the
bottom in terms of fees is questionable when it comes to the increasing risk and responsibility of the board. It
also brings into question the level of independence of directors who provide services that could potentially
conflict with the duties of a director.
Against this back-drop we have seen a raft of new legislation introduced, which requires the board to be up
to speed with the fast pace of global regulatory requirements and compliance. For example, in the Cayman
Islands, the introduction of FATCA, Common Reporting Standards (CRS), the Anti-Money Laundering
Regulations (2018 Revision), the Data Protection Law, 2017 (DPL) and the International Tax Co-operation
(Economic Substance) Law, 2018. As Cayman funds will have a fund manager located on-shore, the directors
must also be up to speed with global regulatory requirements that may impact the fund. This could be EU
regulatory developments for example or regulatory requirements in Singapore, Hong Kong, Canada, the
United States and so on.
Where to Start?
Investigate your options. Be aware that independent directors come with varying backgrounds, experience,
qualifications, styles, interpersonal skills and corporate support. Board composition is about ensuring that
there a breadth of skills and experience to govern and also add value to the over-sight function. Most boards
will be composed of senior individuals who possess experience and qualifications in key areas: (i) Risk
Management; (ii) Fund Management; (iii) Law; (iv) Fund Administration & Operations.
You will have some questions for the prospective director, and you should expect that they will have some for
you in return. Both parties need to be comfortable and confident with each other in order to have a
conducive and effective working relationship. If you can meet the individual in person, it is better, although
this is not usually a practical solution. A telephone conversation will suffice in most circumstances.
Most directors will ask for an overview of the fund legal structure (including any other service providers
appointed such as fund administrator, legal counsel onshore and offshore and auditor), the strategy and
investment objectives of the fund, the types of investors that will be targeted, the number of investors and
their geographic location. If there is a flow diagram of the structure and draft offering memorandum then this
will answer most of the questions and enable an initial discussion. Proposed directors will also usually
request that the fund carries directors and officer’s liability insurance (D&O) that covers all board members.
Most director firms will be able to assist with introductions to insurance brokers that specialize in this area.
Aside from corporate governance, one of the driving factors is often tax-related. Independent directors may
be appointed in a tax-neutral jurisdiction to assist with the tax planning of the investment manager or to
secure the fund’s offshore tax status by ensuring that the jurisdiction in which the “mind, management and
control” of the company is exercised, is offshore. Moreover, a qualified and experienced board of directors
will assist in meeting the underlying requirements. The question remains: how do you go about the selection
process and determine who is the right person for the role?

3. Performing Due Dilligence
There are no hard and fast rules or an all-encompassing list of questions you should ask; however, a
suggested number of questions are set out below for consideration. The list is by no means exhaustive, but it
will hopefully point you in the right direction:
1) Independence
Is the prospective director independent of the investment manager, administrator, legal counsel and all other
service providers? Independence is fundamental to effective corporate governance. If a director is not
independent, conflicts of interest will inevitably arise and interfere with the director’s ability to act in the best
interests of the fund. We have seen an increasing focus by investors on this and steps taken by regulators in
various regions to ensure that independent directors are actually independent and not seen as an “added
service” by service providers who may also be providing conflicting services.
2) Experience
Does the individual have relevant industry experience and experience with the fund’s strategy specifically?
You will get a good idea of their experience from their ‘bio’, which will eventually appear in the offering
document of your fund. You will also want to ask if they have sat on boards with similar strategies or focused
on investments in certain regions. Independent directors will not be experts in every investment strategy;
however, a general understanding of the fundamentals of the underlying strategy is essential.
3) Qualifications
Does the individual have relevant professional qualifications? Remember, the directors are ultimately
responsible for the oversight of the fund’s affairs. A legal, accounting, compliance, investment or other
relevant qualification, combined with experience, will provide a good indication of where their specific
expertise lies and how they will add value.
4) Capacity (number of current positions and time requirement)
How many boards does the director currently sit on and how many manager relationships do they service?
Everyone wants to know the magic number. Unfortunately, there is no definitive number as every relationship
will be different and have its own nuances and complexities. Directors should know exactly how many
relationships and corresponding fund boards they serve on at any given time. You need to be able to assess
if they will be able to devote enough time to fulfil their duties.
A related question is whether the director has the ability to remain in direct contact with the affairs of the
fund from formation onwards. Each director must personally be aware of the fund’s affairs, and having an
adequate support infrastructure to gather information can facilitate this. It is also particularly beneficial for
directors to be able to address matters in a timely fashion in order to discharge their duties so ask about
their time commitments to ensure that matters that are time sensitive can be addressed promptly once his
or she is appointed.
5) Support Services and Infrastructure
Does the individual work for a director services company or are they a stand-alone operation? Although most
consideration should be given to the capabilities of the prospective director, there may be times when the

4. actual person you have selected may not be available. People take vacations, encounter emergencies, come
and go from an organisation or jurisdiction, and start-up businesses often fail.
Confirm whether your director has sufficient support infrastructure to cover these contingencies, and if they
have colleagues who can be appointed in their place should the need arise. Selecting your director from a
director services company can carry distinct advantages in such situations.
Factors to consider when selecting a director services company are: how long it has been in business, its
reputation, whether it is licensed and regulated in relation to the fund services it provides, is it sufficiently
capitalised, and can the company supply more than one director if required.
In the Cayman Islands, or other disaster-prone regions, understand the requirements for disaster
contingency planning. Hurricane Ivan was a wake-up call to Cayman and inevitably tested most, if not all,
disaster recovery plans. Understand whether a director, or directorship services company, has a formal and
documented disaster recovery plan in place.
6) Director Services Agreement (DSA)
Once you have decided to appoint a director, ask for a copy of their director services agreement. Most
professional independent directors will have such an agreement that will set out their terms and conditions.
7) Regulatory Approval or Refusal
Has the individual, or entity by which they are employed, been approved or refused by a regulatory body? An
individual, or entity, who is approved and subject to a regulatory body’s ongoing scrutiny can offer the
reassurance and credibility that they are not only fit and proper, but also familiar with the jurisdiction’s legal
and regulatory regime.
8) Insurance
Does the director require the fund to hold directors’ and officers’ liability insurance or does the director carry
adequate insurance? Directors’ and officers’ liability insurance is becoming increasingly necessary given
today’s litigious environment. Depending on the individual candidate and the specifics of the fund, some
directors will require insurance to be provided by the fund. Others will maintain their own policy or have one
provided by their company. Still, some will ‘roll the dice’ and not have coverage at all. Confirmation that
insurance coverage is maintained will provide an indication of the financial standing of the individual and
organisation, and provide comfort that they have an understanding of the litigation risks prevalent in today’s
environment.
9) Remuneration
How much will they charge? Now that the right individual has been found they must be compensated fairly.
The directors oversee the affairs of the fund, and time and effort required to effectively fulfil their duties.
Directors have significant personal liability, and the penalties associated with a failure in fulfilling their duties
will far exceed the fees received from their post. The remuneration of a director needs to be sufficient to
attract and equitably compensate high-quality individuals. Remuneration may comprise an annual fee and
compensation for time spent, or it may be a fixed annual charge. Out-of-pocket expenses will also be
incurred, which may include standard administrative expenses in addition to travel, lodging and other
expenses properly incurred attending meetings or in connection with the business of the fund. As the saying
goes, “you get what you pay for”.

5. Traditionally, it has been the investment manager who makes the decision on board composition. However,
we have seen an increasing number of investors, place greater scrutiny on board composition. The feedback
from investors has increasingly focused on the fact that expenses of the fund are ultimately borne by the
investors and not the investment manager, so investor expectations can be that those charged with the
pivotal and important role of governance, should be compensated fairly and reasonably. In most cases, the
fees charged by directors is insignificant when taking into account the personal liability, potential capital
raised and the cost in the event of litigation. Moreover, many fund managers capitalize on the benefits of
being able to demonstrate to prospective investors, that the board is qualified, experienced and well
compensated. This can actually enhance a fund offering where investors are performing due diligence on the
governance framework. A fund that is focused solely on obtaining the lowest fees throughout the structure is
not often seen as providing comfort to investors with trusting their capital, no matter how attractive the
strategy may seem.
David Lloyd is the Managing Director of Bell Rock Group (Bell Rock), a professional director firm specializing in
the provision of experienced, seasoned and professional independent directors to hedge funds, private
equity funds, real estate funds, infrastructure funds, investment committees and investment management
boards. David is resident in the Cayman Islands and registered under the Director Registration & Licencing
Law, 2014. He may be contacted on: 345-949-4850 or at: david.lloyd@bellrockgroup.com.
Bell Rock Group is an independent firm providing independent directors to a select number of alternative
investment funds working closely with asset managers, family offices, fund of funds, wealth managers, fintech
and blockchain investment firms in all regions. Bell Rock also provides registered office, fund structuring
services, company secretarial services and compliance services such as MLRO, Deputy MLRO and AML
Compliance Officer. Bell Rock Group is licenced and regulated by the Cayman Islands Monetary Authority
(CIMA), a member of the Alternative Investment Managers Association (AIMA), the Investment Management
Due Diligence Association (IMDDA) and the Hedge Fund Association (HFA).