Board of directors

A board of directors acts as the main governing body for offshore hedge funds that are structured as corporations. This board provides oversight and protects investors in a way that differs significantly from domestic hedge funds.

Most hedge funds in the United States are organized as limited partnerships. In these structures, a controls the fund's operations. Offshore hedge funds, however, are often set up as corporations in countries like the Cayman Islands or Bermuda. These corporate structures require a board of directors to provide governance and accountability to investors.

The board structure gives institutional investors—such as and —additional oversight and protection that they often require before investing in hedge funds. This corporate governance approach helps satisfy the fiduciary and regulatory requirements that many institutional investors must meet.

Most offshore fund corporations have boards with at least three directors. The majority of these directors must be independent from the investment manager who runs the fund.

Independent directors are professionals who are not employees of the fund manager and have no other business relationships with the manager. These directors work in a non-executive capacity, meaning they oversee but do not manage day-to-day operations. Professional service companies in offshore jurisdictions specialize in providing independent directors to multiple funds for fees.

The board typically includes both independent directors and directors who work for or represent the investment manager. The manager-affiliated directors are usually the main principals or executives of the . This mixed composition ensures both independent oversight and direct manager representation.

The board gets its authority from two main sources: the fund's memorandum and articles of association (the corporate governing documents) and the provided to investors. These documents give the board power to oversee the fund's business, take actions on the fund's behalf, and vote on important matters.

The board serves as the central decision-making body for the fund. However, boards often delegate certain powers to maintain efficient operations since board members cannot be involved in every daily decision.

The board's authority covers fundamental aspects of how the fund operates. This includes the power to make binding decisions that affect investor rights, fund operations, and compliance with laws and regulations. This authority structure assures investors that major decisions will be reviewed and approved by independent fiduciaries who are not directly paid based on the investment manager's performance.

The board of directors oversees the fund's operations and ensures the fund follows its established policies. These policies include the fund's governing documents, disclosure materials given to investors, internal , and applicable legal requirements. The board handles both routine oversight and extraordinary decisions that can significantly affect investors.

The board's typical responsibilities include several key areas. First, they monitor whether the fund follows its governing documents and internal policies. Second, they review and approve major transactions, especially when conflicts of interest exist between the manager and the fund. Third, they ensure all fund investors receive fair and equal treatment. Fourth, they verify that proper risk management procedures are in place throughout the fund's operations. Finally, they evaluate and approve the arrangements with service providers such as administrators, auditors, and custodians.

These responsibilities create a comprehensive oversight system that addresses both daily operations and strategic decisions that could impact the fund's performance or investor rights.

The board may delegate portions of its authority to the investment manager or the administrator to allow for more timely and efficient decision-making on the fund's behalf. This delegation recognizes that boards cannot practically be involved in every operational decision while still maintaining ultimate responsibility for fund governance.

The balance between board oversight and operational efficiency requires careful consideration. Boards must delegate enough authority to enable smooth daily operations while retaining oversight of decisions that could materially affect investor interests or fund compliance. The specific scope of delegated authority is typically defined in the fund's governing documents and board resolutions.

Board member compensation reflects the distinction between independent and affiliated directors. Independent directors typically receive a fixed annual fee paid by the fund. This fee structure provides them with economic independence from the investment manager's performance, ensuring their interests align with fund investors rather than the manager.

Affiliated directors—who are employees or representatives of the manager—generally receive no compensation for their board service except for reimbursement of direct travel and related expenses. This compensation structure reinforces the independence of non-affiliated directors while recognizing that affiliated directors already receive compensation through their employment with the manager.

To manage potential conflicts of interest, affiliated directors must abstain from decisions where they have a material financial interest. This requirement ensures that decisions involving conflicts between the manager and the fund are made by independent directors who can exercise objective judgment on behalf of all investors.

In some offshore hedge fund structures, the board's authority overlaps with management share arrangements. Management shares are a special class of shares that typically give the holder certain control rights over the fund.

The holder of management shares may have the right to determine who serves on the board, modify the fund's memorandum and articles of association, or initiate the process to liquidate the fund. However, the management share holder cannot vote in ways that would change the fundamental rights of ordinary shareholders who invested in the fund.

This interaction creates a governance structure where certain fundamental decisions can be made efficiently by the management share holder, while other decisions require board approval and independent director oversight. The relationship between board authority and management share control helps balance operational efficiency with investor protection, though the specific allocation of authority should be clearly defined in the fund's governing documents to avoid conflicts and ensure effective governance.