08 February 2010

CONFIDENTIAL

HFSB Q&As for new Signatories: Potential press questions/talking

points:

Q. What is the HFSB?

The Hedge Fund Standards Board Ltd (HFSB) has been set up to monitor
conformity to the hedge fund best practice standards. As a custodian of the
best practice standards it has the responsibility to ensure they are updated
and refined as appropriate.

The hedge fund best practice standards were drawn up by the Hedge Fund
Working Group (HFWG). The HFWG, comprising 14 major hedge funds
based mainly in London, was set up in 2007 in response to concerns about
the industry including financial stability and systemic risk. The HFWG
completed its work in January 2008 when it published its report outlining the
standards.

Antonio Borges became the permanent chairman of HFSB on 1 July 2008

and a permanent board of trustees is now in place.

Q. Why did you apply to become a signatory to the HFSB?

A. Hedge funds have become a critical part of the financial system both
because of their size and influence and because they are at the forefront of
financial innovation. So it is very important that hedge fund managers
adhere to standards that give confidence to investors, financial regulators
and the wider public.

Additional talking points:

• Achieving conformity with the HFSB helps us to demonstrate to
existing and prospective investors that we as a firm are committed to
best practices across all areas set out by the Standards, including
Disclosure, Valuation, Risk Management, Fund Governance and
Shareholder Conduct.
• We at <…> have a strong culture of compliance, sound operational
processes and risk management. Therefore, becoming a signatory to
the HFSB seemed to be a natural step.
 • Given the public scrutiny of the Hedge Fund industry and concerns
among regulators and investors at large, we find it important to
reassure all stakeholders that we at <…> are committed to best
practices and are good “citizens in global capital markets”.
• We accept that the Hedge Fund industry needs to live up to its
responsibilities as a significant and influential part of the financial
system as well as an important source of financial innovation.
• The process of achieving conformity is very useful. It helps us to
ensure that our all vital operational procedures are waterproof, and the
HFSB process allows us to demonstrate this to investors via the
comply or explain mechanism.

Q. Do you think the HFSB is a genuinely independent body?

The HFSB has a broad mixture of Trustees, not only including Hedge Fund
Managers, but also involving a significant number of investors from pension
funds, fund of funds, insurance companies and sovereign wealth funds. This
broad representation of both managers and investors on the Board allows it
to have a large practitioner element and to ensure that investor concerns are
adequately considered.

Q. How difficult is the sign up process?

A. Managers who were not involved in the initial process of developing the
standards will need to go through several stages before achieving
conformity:
• assimilate and understand the best practice standards;
• assess the implications of becoming a signatory;
• do side-by-side analysis with their existing practices to decide whether
they are compliant or not;
• if they’re not compliant they need to decide whether they will comply
or explain.

Q. What is the attitude of regulators and the official sector?

A. There has been great support for this process from governments in the
UK, France and Germany. The Financial Stability Forum, the Committee of
European Securities Regulators (CESR) and the FSA among others have
also been very supportive. The HFSB is in discussions now how some of
these bodies can help push the process forward.
The HFWG report

Q. What were the key recommendations in the HFWG report?

A. The key recommendations in the report were the best practice standards,
which focus particularly on disclosure, valuation, risk management and fund
governance. In addition the HFWG outlined a process for updating the
standards going forward. This involved the creation of the Hedge Fund
Standards Board (HFSB), with a board of trustees to be the custodians of the
standards both to develop and refine the standards in the future and to
monitor progress.

Q. What did it say on risk management?

A. Managers should develop a framework to assess risk in totality by
bringing together the assessment of all different types of risk such as market,
operational, legal, technical and regulatory etc. In addition there should be
more emphasis given to liquidity risk.

Q. What did it say on fund governance?

A. There should be an adequate governance process in order to deal with the
potential conflict between investors and managers. The standards address
this by requiring managers to do what they reasonably can at all times, that
is to say at the beginning of the fund's life and then as the fund grows, to
ensure it has an appropriate governance structure and appropriately
composed board.

Q. What did it say on valuation?

A. We said that there should be an independent process to ensure that
decisions on valuation are separated from the portfolio management role in
order to protect investors from potential conflicts of interest between the
two. To achieve this, valuations should be carried out where possible by a
competent external party. If that’s not possible and valuation is done in-
house, then the process should be validated by an external party.

Q. What exactly is meant by independence in the valuation process?

A. The key is that the portfolio manager who is remunerated on the basis of
fund performance does not make the decision on the valuations declared to
investors.
Enforcing conformity

Q. How is the HFSB going about enforcing conformity with the

standards?
A. The HFSB is not going to enforce conformity. Market discipline will
ensure that people conform.

Q. So does the HFSB have any real teeth? What are they?
A. Ultimately this whole process depends on the investors. They are the
people with the teeth because it is they who decide whether to put their
money with a particular hedge fund manager. If, as we believe will happen,
investors make clear they want managers to conform with the best practice
standards, the process will have real teeth.

Q. Is the HFSB a voluntary regulator or just a talking shop?

A. Neither. It is not a regulator. It is a custodian of the best practice
standards with the responsibility to ensure they are updated and refined as
appropriate going forward. It will make enquiries of relevant parties in the
UK and overseas with a view to ensuring that the standards remain valid and
current.

Q. But isn’t this an exercise in self-regulation by the industry? Surely,

the HFSB has in practice some regulatory powers?
A. No the HSFB does not have and is not intended to have regulatory
powers. This is an industry-led initiative that relies on market discipline to
ensure that the hedge fund industry lives up to its responsibilities and
adheres to best practice standards.

Q. Why comply or explain? Why not just comply?

A. A comply only regime would have required much more detailed, lengthy
standards and would have been far more prescriptive. The advantage of
comply or explain is that it rests on disclosure and needs only minimum
prescription. It is also makes it much easier to amend the standards going
forward. In addition it fits with the FSA’s desire to encourage more
principles-based regulation.
Practical issues/FAQs

Q. To whom do the standards apply?

A. The standards are designed for hedge fund managers and they are all
encouraged to become signatories. They are also intended to apply to
broader asset management groups but only in respect of their hedge fund
management activities.

Q. Do the standards just apply to hedge fund management or to other

types of asset management activity as well?
A. The standards are designed to apply to hedge fund management activities.
If asset managers wish to use the standards more widely beyond hedge fund
management that is up to them.

Q. Where can managers find the standards?

A. The standards are available on the Hedge Fund Standards Board (HFSB)
website at www.hfsb.org along with full details of how to sign up.

Q. How do managers sign up to the standards?

A. Managers can download a signatory pack from the HFSB website at
www.hfsb.org and that has full details of the process.

Q. Do managers have to go through the process of conforming every

year?
A. Yes they need to confirm each year that they conform with the standards.
It is important that managers demonstrate to investors and other
counterparties that this is a continuing process and not something they sign
up to once and then forget about.