Domestic hedge funds typically have no governance analogue to the offshore fund board of directors. This governance asymmetry has been receiving increased scrutiny from regulators and investors, and that scrutiny has grown stricter in light of a series of notable governance failures
. In response to that scrutiny, hedge fund managers have been exploring, and in some cases implementing, advisory committees for their domestic funds. At a broad level, advisory committees serve as a proxy board of directors for domestic hedge funds, typically Delaware limited partnerships. But advisory committees often do more than replicate onshore the functions of an offshore board of directors. To help hedge fund managers assess the applicability of advisory committees to their circumstances, this article – the second in a two-part series – addresses what types of funds should organize advisory committees; issues involved in organizing an advisory committee (including determining the committee’s composition and compensation); operation of advisory committees; benefits and drawbacks of serving as an advisory committee member; and liability and indemnity protections afforded to advisory committee members. The first installment discussed what advisory committees are; their principal functions; how they are different from offshore fund boards of directors; how much authority advisory committees typically have; and the principal benefits and drawbacks of organizing and operating advisory committees. See “How Can Hedge Fund Managers Use Advisory Committees to Manage Conflicts of Interest and Mitigate Operational Risks? (Part One of Two)
,” Hedge Fund Law Report, Vol. 6, No. 15 (Apr. 11, 2013).