Advisory board

Hedge funds don't have to create advisory boards, but many choose to do so. An advisory board brings together qualified industry professionals who offer guidance to hedge fund managers. Funds typically create these boards when they want to improve their decision-making processes and oversight beyond what's legally required.

These boards serve as an optional alternative to having just one manager or management company make all operational decisions. The main feature that sets advisory boards apart from other governance structures is their role: they provide advice and expertise without taking on formal or direct decision-making power.

This makes them different from conflicts committees, which typically have specific authority to approve certain transactions. For example, conflicts committees often need to approve under Section 206(3) of the .

Fund managers can design advisory boards with different levels of authority. This choice depends on their governance goals and what their investors require. The structure determines how much real influence the board has over fund operations.

In a purely consultative setup, advisory boards act as expert resources. Management asks for their input on areas like investment strategy development, asset valuation methods, and service provider selection. Managers may also require regular reports to keep advisory board members informed about fund performance and operational developments.

Some funds give their advisory boards more substantial authority. They require management to get formal consent before taking certain significant actions. This approach creates meaningful oversight that can limit management's broad discretionary powers. It adds additional governance checks to the decision-making process. This structure provides investors with greater protection, but it may slow down operational decisions.

Fund governing documents must clearly define several key aspects of the advisory board. These include the board's scope of authority, operating procedures, and relationship to other governance bodies within the fund structure. This documentation ensures clarity about the board's responsibilities. It also prevents confusion about decision-making authority between management and the advisory board.

Without proper documentation, disputes can arise over who has the authority to make specific decisions. This can create operational inefficiencies and legal complications.

The use of advisory boards in hedge funds differs significantly from advisory committee structures commonly found in private equity funds. Private equity advisory committees typically have specific authority to address conflict situations, review asset valuations, and approve various manager actions. In contrast, hedge fund advisory committees are much less common and generally have more limited authority.

When hedge funds do establish advisory committees, their primary function often focuses on approving principal transactions. This helps satisfy Section 206(3) compliance requirements under the Investment Advisers Act. This regulatory compliance function represents a narrower scope than the broader governance role typically seen in private equity.

Domestic hedge funds structured as typically allow the to select advisory board members from among the fund's investors. This contrasts with private equity funds, where large investors frequently negotiate for specific advisory committee representation. The general partner's selection authority gives fund managers greater control over board composition.

In some cases, professional directors who serve on offshore fund boards may simultaneously serve on advisory boards for parallel domestic funds. This creates governance consistency across fund structures.

However, domestic partnership law doesn't provide the same protections and duties that apply to offshore corporate directors. Therefore, advisory board members serving domestic funds must have their roles, responsibilities, and protections established through contractual arrangements. These arrangements must be included within the rather than through provisions. This creates additional complexity in structuring domestic advisory boards compared to offshore corporate structures.

Advisory boards serve as important mechanisms for addressing that arise during fund operations. When getting consent from all fund investors would be impractical, some investment advisers establish advisory boards or conflicts committees. These provide independent review and approval of principal transactions involving their funds. This structure helps satisfy regulatory requirements while maintaining operational efficiency.

The SEC has increasingly focused on the effectiveness of these governance mechanisms. Recent enforcement actions from 2022-2025 have emphasized that advisory committees must actually function independently. They can't simply provide rubber-stamp approvals. The SEC expects these bodies to conduct meaningful review and ask probing questions about potential conflicts.

This function becomes particularly valuable when funds need to execute transactions quickly but still require independent oversight to meet regulatory compliance standards.

While the regulatory framework provides considerable flexibility in advisory board design, effective implementation requires careful attention to several operational factors. These include member selection criteria, compensation structures, meeting protocols, and information access arrangements. The advisory board structure's adaptability allows funds to customize these arrangements based on their specific strategic needs, investor base characteristics, and operational complexity.

Fund managers must balance the benefits of expert guidance against the potential costs. These costs include operational delays and additional expenses associated with maintaining an advisory board structure. Compensation for advisory board members typically ranges from annual retainers to per-meeting fees. The amount depends on the scope of responsibilities and time commitment required.

The regulatory environment governing advisory boards is relatively permissive. This gives funds significant discretion in structuring these arrangements. However, funds must ensure that advisory board operations are properly documented. They must not create undisclosed conflicts of interest, and they must maintain compliance with fiduciary obligations to investors.

Under the SEC's 2019 Interpretation of Investment Adviser Fiduciary Duty, advisers must ensure full and fair disclosure of all material conflicts of interest. Advisory boards can help satisfy this obligation by providing independent oversight. However, they can't substitute for proper disclosure to investors.

The integration of advisory boards within the broader fund governance structure requires careful consideration. This helps avoid regulatory complications while achieving the desired oversight objectives. Fund managers must coordinate advisory board activities with other governance structures like and investment committees. This coordination creates a coherent governance framework.