Hedge Fund Compliance. Scharfman Jason А.

fund manager would wish to boost the performance of this poor performing fund by allocating more shares to it. While benefiting the offshore investors, this would disadvantage the onshore investors.

      It is the role of a hedge fund's compliance function to design the policies with regard to the way trades are allocated and to oversee the implementation of these policies in conjunction with investment personnel. In such an example, the compliance function would be tasked with playing an active role in overseeing that the allocation of trades among the funds is conducted in an manner that does not unfairly disadvantage the funds investors and complies with regulatory guidelines as well as the fund managers own internal policies.

      • Non‐investment‐related compliance areas. These are areas where compliance policies and procedures relate to more operationally focused areas, such as guidelines and oversight governing the travel, gifts, and entertainment given to and received by the employees. A business development representative may travel to a conference to meet prospective clients. While this capital, if raised, will be utilized in the investment process, the actual travel and the raising of the capital does not directly relate to the day‐to‐day investments made by the fund. Therefore, it could be said that this type of compliance is in the non‐investment‐related compliance category.

      Compliance plays a role in overseeing these types of activities. For example, if the prospective client is a government employee, there may be limits to the value of any gifts or meals they are allowed to receive. Similarly, to avoid gaining undue influence by service providers through lavish gifts, a hedge fund's own internal compliance policies may limit the value of gifts its own employees can receive.

      • Practical firm‐wide compliance approaches. In practice, the design of a successful hedge fund compliance management program does not place too much emphasis on the distinction between investment and operational compliance. Rather, the focus is on ensuring that all compliance policies and procedures, be they investment or noninvestment, are complied with. The distinction between the two is an important one to keep in mind however, from the perspective of implementing and managing the compliance function.

      1

      U.S. Securities and Exchange Commission. General Information on the Regulation of Investment Advisers, www.sec.gov/divisions/investment/iaregulation/memoia.htm.

      2

      Jason Scharfman, Hedge Fund Operational Due Diligence: Understanding the Risks (Hoboken, NJ: Wiley Finance, 2008).