A “best practice” describes a set of guidelines, procedures, ethics or ideas that a manager follows in order to align its interests with its investors’.
Best practices should include the following:
A sponsor investment refers to a manager’s investment in its own fund, which helps to align the interests of the manager with its investors’. The thinking is simple—a manager that makes a significant investment in its fund, commonly referred to as having “skin in the game,” has an added incentive to ensure the interests of shareholders always come first.
Managers that place an emphasis on transparency believe investors have a right to know and understand all aspects of their investments. Some fundamental ways that an alternative asset manager can provide this level of insight include:
- Providing the value of its investments on a regular basis. This is an important best practice when investing in alternative assets, whose valuations rely less on publicly available information compared to traditional investments and more on a manager’s expertise and analysis. Alternative asset managers may hire specialized, third-party service providers to assist in the valuation process and provide an unbiased, independent value for a fund’s investments.
- Maintaining an independent board of directors and an independent custodian to provide an additional layer of oversight and avoid potential conflicts of interest
- Disclosing all investment holdings and their respective values through regular public filings with the U.S. Securities and Exchange Commission
An investment fund’s board of directors provides oversight of the investment adviser (manager) and its sub-adviser. An independent board has a majority of outside directors who are not affiliated with the manager and have no business dealings with the fund or manager to avoid potential conflicts of interests.