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Different types of institutional investors have different propensities to engage, influenced by the regulatory environment, the size and distribution of their portfolios, their time horizons, and the financial incentives of fund managers, as well as by corporate performance. The chapter identifies the costs and benefits of engagement. USS Limited is examined as a case study of a major pension fund, with an articulated investment philosophy.

Institutional investors adopt different methods of engagement. Much investor engagement is routine and informal; other engagement is extraordinary and arises from specific circumstances, such as firms adopting remuneration policies which are viewed as inconsistent with ‘best City practice’. Routine engagement is conducted by individual investors. But extraordinary engagement is usually conducted through collective organizations, such as the Institutional Shareholders' Committee, as a means of reducing the costs of monitoring and intervening and addressing ‘free rider’ problems.

This chapter examines the rise of the institutions. The term ‘institutions’ is used to describe all kinds of collective shareholdings. Included are both UK- and overseas-based investors in the following categories: insurance companies and pension funds, investment trusts and unit trusts, and the fund managers employed to invest on their behalf. In addition, there are stockbrokers and the trustee departments of banks, which, although relatively small, do hold shares on behalf of their clients. What distinguishes these institutions from other shareholders is that they are investing money on behalf of others: this puts them in a fiduciary role, which imposes various duties under the principles of trust law.

This chapter discusses private equity funds. It looks at the typical fund structures, who invests in private equity, and compares and contrasts alternative investment options. A private equity fund is a form of ‘investment club’ in which the principal investors are institutional investors, such as pension funds, investment funds, endowment funds, insurance companies, banks, sovereign wealth funds, family offices/high net worth individuals and funds of funds, as well as the private equity fund managers themselves. Private equity funds have a limited life, meaning that there is a pre-agreed date on which they will stop making new investments and subsequently be wound up. Typically, a fund invests in new projects for six years and is wound up in ten years. There is a standard extension period of two years in most fund agreements, hence they are generally known as ‘ten plus two’ limited life funds. In the past few years, some longer-term funds have started to be raised by some fund managers. These are typically targeting growth capital. The chapter then differentiates limited partners (external investors) from the general partner (the manager). It also studies the economics of private equity, examines the details of a representative Limited Partners Agreement as well as taxation, and describes the secondary fund market.

Chapter 8 addresses the issue of whether hedge fund regulation mitigates or exacerbates the tendency of fund managers to misreport returns. By examining cross-country evidence on misreported returns, it is possible to infer by holding other factors constant the impact of international differences on hedge fund regulation on the propensity to misreport returns. Further, the chapter examines and calculates explicitly whether it pays to misreport.

Against the background of existing or developing obligations and the conclusion that many shares are under the effective control of a relatively small group of fund managers, the question to be asked concerns what strategies are open to them. If they are in-house, what strategy can they sell to their own management/board? If they are professional fund managers what strategy can they sell to the trustees to whom they look for business or to the consultants advising them? This chapter discusses the three main types which have an impact on corporate governance: active investing, value investing, and indexation.

Portfolio fund managers incorporate all types of economic, social, and political information in their investment decisions, and evaluate risks and uncertainties when they buy (or sell) a bond or stock. Through exploring fund manager asset allocation databases, this chapter looks at the ways investments in equities and bonds are affected by emerging market political events such as elections, and changes in the level of democracy. Several hypotheses on the link between finance and politics are tested in this chapter, by combining information from a database of portfolio flows towards emerging markets, with election and democracy information.

Managerial skill is a key determinant of a hedge fund’s success. Identifying the key characteristics of successful managers is important because of a strong relation between hedge fund performance and managerial skills. This chapter provides a brief history of some highly successful hedge fund managers as well as a discussion of the different demands of the hedge fund industry versus other pooled investments, such as mutual funds. Furthermore, the chapter examines the differences between hedge fund and mutual fund managers involving return expectations, performance measures, and compensation. Next the chapter explores the key characteristics that hedge fund managers should possess to be successful. Although some characteristics are easy to identify and measure, others are less so. The chapter also includes a detailed discussion of social versus human capital.

This chapter defines private equity, describes the origins of the private equity market, and examines the data on the size and growth of the private equity industry. Private equity is risk capital provided outside the public markets. The businesses invested in by private equity range from early stage ventures, usually termed venture capital investments, through businesses requiring growth or development capital to the purchase of an established business in a management buyout or buy-in. Much, but not all, of the investing done in the private equity market is by private equity funds. The objective of a private equity fund is to invest equity or risk capital in a portfolio of private companies which are identified and researched by the private equity fund managers. The chapter then considers what private equity fund managers do. It also provides a brief history of private equity before assessing how big the private equity market is.

This chapter discusses risks of investing in hedge funds. Investors are not allowed to know how hedge funds work, every fund is different, and they offer no warranties. In fact, it is quite easy for a hedge fund manager to “fake” high performance over an extended period of time without getting caught. Hedge fund managers get paid for making bets that put their investors at risk, while taking very little risk themselves. If the fund blows up, the investors cannot tell whether it was due to bad management or just bad luck. However, some steps can and should be taken toward protecting investors. All hedge funds should be required to register as soon as they are established and to report their returns on a regular basis. Such tracking would allow potential investors to study the records. Alternatively, managers could guarantee that losses not exceed a certain level, similar to a car manufacturer offering a warranty.

This chapter centres on social security systems and their merits and deficiencies. Singapore's Central Provident Fund is not common among social schemes in that it does not include redistribution features, and it yields merely negligible real returns after taking into account the inflation rate. The Chilean scheme managed to rebound swiftly following the attack of the global financial tsunami, and this can indeed be ascribed to keen competition among fund managers for the savings of workers. The regulations of Hong Kong's Mandatory Provident Fund (MPF) are by no means free from flaws, and they seriously impede effective competition. Employee fund portability is instrumental in triggering competition among fund management providers, and MPF administration has to be largely simplified as well.

This chapter addresses the problem with relying on short-term market indexes as benchmarks for performance of long-term-oriented sovereign wealth funds (SWFs). It argues that SWFs are ideally placed to earn a liquidity premium demanded by more short-term-oriented investors in the market. However, it cautions against a general prescription of seeking to sell insurance all the time against any kind of risk, since this would be a recipe for disastrous investments. When to provide liquidity and when not to requires judgment. It also means that sometimes market indexes are appropriate benchmarks and sometimes they are not. Faced with this dilemma, the chapter proposes that SWF managers be given broad discretion in the fund's investment policy, but that managers should be compensated based on long-term performance of the fund. It also argues against the high-powered incentive pay that has become the norm in the private equity and hedge fund sectors, and instead favors the enforcement of clawbacks should the fund perform poorly in the long run.

Hedge fund governance has attracted much interest since the financial crisis of 2007–2008 resulting in a dramatic shift in hedge funds’ shareholder composition, from high-net-worth individual investors to active institutional investors. The crisis, coupled with some major scandals, including Bernard Madoff’s multi-billion-dollar Ponzi scheme and the Weavering Capital fraud, uncovered poor governance practices in the hedge fund industry. Fund managers now face serious governance challenges that tend to focus on governance arrangements and independence of fund boards. Maintaining quality governance rules in hedge funds is critical for the industry. Evidence suggests that having sound and transparent governance practices is in the best interests of hedge fund managers. This chapter first addresses the development of corporate governance, followed by an analysis of hedge fund governance. Next the chapter explores the ongoing governance debates facing the industry. The chapter ends by discussing the changing nature of hedge fund governance.

This chapter argues that the role of institutional investors is crucial in matters of corporate accountability. After all, these investors, more than anyone, guard the savings of the people. Thus, the chapter provides an overview of two types of institutional investing: types A and B, with the former approach being the ideal. The chapter then explores the motivations surrounding the preference of most fund managers and trustees of one type to another. It re-examines the type A approach under such issues as free-rider problems, the internationalization of stock-markets, insider trading, responding to bids, and the fact that the type B process has become so engrained as to make change difficult.

This chapter presents reflections about the conference and directions for future research. It begins with a general observation about the impressive research that has been done to help us understand what sovereign wealth funds (SWFs) have been doing and to provide insight into what these funds could or should do. It then discusses some major theoretical and analytical challenges. It suggests that research should focus on how SWFs and other long-term investors can unshackle themselves from the thinking imposed by short-term markets. It also highlights the desirability of using some of the capital of SWFs for investments that yield high social returns from a global perspective.