Irish Law Times

Corporate Governance in the Hedge Fund Industry

Corporate Governance in the Hedge Fund Industry


Internationally there have been a number of approaches taken to corporate governance, particularly in relation to the corporate governance of the funds industry and more specifically to that of hedge funds.

The collapse of the Madoff Empire, the onset of the financial crisis and the heightened global media attention concerning the many illegalities and irregularities of the financial services markets placed corporate governance and the regulatory environment of the funds industry under immense scrutiny. Throughout the turmoil, the United States continued its traditional approach to corporate governance by implementing a ‘rules based approach’. The EU continued to follow it’s ruled based approach by updating its existing legislation.  Ireland, for the first time, introduced its own corporate governance code for investment schemes and followed the principal based approach to corporate governance similar to that of its UK counterpart. This artilce aims to address the law relating to the fund industry and the international changes that have taken place to the regulatory environment in order to prevent a future Madoff-like scandal from arising.

Madoff Investment Scandal

Although hedge funds were not directly responsible for the 2007 financial crisis, they did assist in creating a volatile market by fuelling the 2008 sub-prime mortgage market collapse through short-selling and mass deleveraging. This volatility reached breaking point as a result of the Madoff scandal.

The scandal highlights the importance of due diligence and independence of the board of directors. The scandal involved Bernard Madoff Investment Securities LLC, a registered broker dealer.Madoff managed to operate his firm successfully for over 17 years and it was considered the most successful investment firm in the world but it collapsed in 2008. The firm for decades was known as a trading and market-making firm, however the firm from behind closed doors, was running a clandestine investment advisory business. It was not until 2006 that Madoff became a registered investment advisor. This clearly highlights the blatant disregard to compliance and regulation by regulatory agencies not just in the US.

Madoff’s firm boomed during the 1990s as the derivate market saw an explosion in growth and more exotic and complex financial instruments entered the system. Throughout the 1990s he requested capital from his customers, promising that they would be repaid back with a higher interest. During this period, corporate bonds rated AAA, yielded 7.7 per cent interest on…

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