Document TIB-FRM-HF-1.0
Issued 16 April 2026
Module of TIB-FRM-1.0
Verification Module — Hedge Funds
Twenty-four binding criteria for verification engagements with single-strategy and multi-strategy hedge funds, including offshore and onshore vehicles operating performance-fee structures, redemption gates, lock-ups, and similar pooled-fund features.
© 2026 Stratinova LTD. All rights reserved.
About this module
This module (the HF Module) extends the universal TIB Integrity Standards with criteria specific to hedge funds — pooled investment vehicles operating under performance-fee structures, redemption gates, lock-ups, or other features distinguishing them from long-only mutual funds. It is invoked alongside the Asset Managers Module (TIB-FRM-AM) where the manager runs both pooled vehicles and segregated accounts, and alongside the Custodians Module (TIB-FRM-CU) where the prime-broker / custody arrangements are within scope.
The module adds twenty-four binding criteria (HF-1 through HF-24). It is informed by widely adopted industry codes including the AIMA / MFA Sound Practices, the ILPA Principles for limited-partnership funds (analogically), and IOSCO Principle 31 (collective investment schemes).
Verification Module — Hedge Funds
Twenty-four binding criteria with rationale, requirement, evidence rubric, illustrative cases, and cross-references.
Scope
This Module applies whenever the engagement covers a Firm operating one or more pooled investment vehicles with hedge-fund characteristics — performance-fee structures, redemption gates, lock-ups, side pockets, holdbacks, or limited liquidity terms.
Joint application
The Asset Managers Module (TIB-FRM-AM) applies to the manager-level functions; this Module applies to the fund-level governance. Where the engagement covers both, both modules are invoked.
Out of scope
TIB does not opine on investment merit, strategy quality, or expected returns. Audited financial statements are the authoritative basis for fund accounting; TIB observations in valuation areas are corroborative only.
Definitions
- Vehicle — a pooled investment fund within the engagement scope.
- Administrator — the third-party entity producing NAV and processing subscription / redemption.
- Prime Broker (PB) — an entity providing custody, financing, securities lending, and trade settlement to a hedge fund.
- Gate — a contractual mechanism limiting redemption above a threshold (e.g. 25% of NAV per quarter).
- Side Pocket — a sub-account holding illiquid or hard-to-value positions, often with separate redemption rules.
- Side Letter — a bilateral agreement granting specific investors terms differing from the offering memorandum.
- MFN — most-favoured-nation; a side-letter provision granting the investor the benefit of better terms granted to subsequent investors.
- High-Water Mark (HWM) — the highest NAV per unit since the last performance-fee crystallisation, used to ensure performance fees are charged only on new high-water gains.
Theme map
| Theme | Criteria | Universal pillar | Section |
|---|---|---|---|
| Service provider diligence | HF-1, HF-2, HF-3 | TIB-IS.1 / TIB-IS.5 | § 4 |
| Prime broker arrangements | HF-4, HF-5, HF-6 | TIB-IS.2 / TIB-IS.5 | § 5 |
| Gating and suspension | HF-7, HF-8, HF-9 | TIB-IS.6 Disclosure | § 6 |
| Side letters and MFN | HF-10, HF-11 | TIB-IS.6 Disclosure | § 7 |
| Performance fees and HWM | HF-12, HF-13, HF-14 | TIB-IS.6 Disclosure | § 8 |
| Redemption mechanics | HF-15, HF-16, HF-17 | TIB-IS.4 / TIB-IS.6 | § 9 |
| Counterparty risk | HF-18, HF-19, HF-20 | TIB-IS.5 Risk | § 10 |
| Leverage and derivatives | HF-21, HF-22, HF-23, HF-24 | TIB-IS.5 Risk / TIB-IS.6 Disclosure | § 11 |
Service provider diligence
Independent administrator
A third-party administrator independent of the manager separates NAV production from manager economic interest. Manager-administered NAV is the highest valuation-risk configuration and was the structural backdrop to several historical scandals.
The Vehicle engages an administrator independent of the investment manager, with documented diligence at onboarding and at least annually.
Independent auditor
Annual audit by an independent qualified auditor is the core external assurance over fund accounting and valuation. Auditor changes can signal underlying issues; documented rationale is appropriate.
An independent auditor with appropriate qualification audits the Vehicle's annual financial statements. Auditor changes in the trailing five years are documented with rationale.
Service-provider concentration
Concentration of service providers (administrator + auditor + PB + lawyer all from same group) creates structural blind spots. Diversification is appropriate.
Material service providers are sourced from independent firms; affiliated relationships are disclosed; material concentration justified or remediated.
Prime broker arrangements
Prime broker selection and diligence
Prime broker insolvency is one of the largest binary risks to a hedge fund (cf. Lehman 2008). Diligence at selection and refresh is the operational defence.
Each prime broker is subject to documented diligence at onboarding and at least annually, including credit assessment, conflict review, and segregation arrangement verification.
Asset segregation and rehypothecation
Rehypothecation by the prime broker converts the fund's claim from a property right into a contractual claim subject to PB credit risk. Investor disclosure of the rehypothecation regime is essential.
The fund's assets held with the prime broker are segregated to the extent permitted by the operating jurisdiction. Where rehypothecation is permitted, the limit is documented and disclosed to investors.
Multi-PB resilience
Sole-PB dependence concentrates failure risk; even where commercially uneconomic for small funds, the question is whether the resilience plan is documented.
Where the fund relies on a single PB, a documented resilience plan addresses what happens on PB stress (transfer, lift-out, contingent secondary PB).
Gating and suspension
Gate, suspension, side-pocket policy
Gating and suspension are legitimate liquidity-management tools but, unrestrained, they trap investors. The integrity question is whether the trigger conditions, scope, and duration are bounded by ex-ante rules.
Where redemption gates, suspensions, side pockets, or holdbacks are reserved in the offering documents, the trigger conditions, scope, duration limits, and investor-disclosure cadence are documented.
Historical use disclosure
Past use of gates is materially informative for prospective investors. Disclosure converts historical events into intelligence about manager behaviour under stress.
Material historical uses of gates, suspensions, or side pockets in the trailing five years are disclosed in summary form to prospective investors.
Liquidity-stress framework
A documented framework matching portfolio liquidity to redemption terms reduces the probability of disorderly gates.
A documented liquidity-stress framework matches portfolio liquidity profile to redemption terms; periodic stress tests are run against adverse scenarios.
Side letters and MFN
Side-letter governance
Side letters are routine in institutional fund-raising but, if uncontrolled, they create a class of preferred investors whose terms erode the offering memorandum's apparent commitments.
Side-letter use is governed by a written policy specifying who may grant them, what categories of variation are permissible, and how MFN treatment is administered.
Side-letter disclosure to fund
Side letters that materially affect the fund (e.g. preferential redemption, transparency) should be disclosed to other investors at the appropriate level of generality.
Material categories of side-letter variation are disclosed in summary form to investors. Where a side letter affects valuation, redemption, or fee charges of other investors, that effect is specifically disclosed.
Performance fees and HWM
High-water mark mechanics
HWM design (per-investor vs per-class, equalisation methodology, treatment of subscriptions) materially affects fee fairness across investors who subscribe at different times.
HWM methodology is documented including: per-investor or per-class basis; treatment of subscriptions and redemptions; equalisation methodology; crystallisation cadence.
Performance-fee transparency
Performance fees are disclosed gross and net of all fees and expenses; hurdles, catch-ups, clawbacks must be explicit.
Performance fees are disclosed gross and net of all fees and expenses. Hurdles, catch-ups, and clawback provisions are explicit in the offering documents.
Manager co-investment disclosure
Manager co-investment (or its absence) is materially informative to investors assessing alignment.
Manager and senior personnel co-investment in the Vehicle is disclosed at the appropriate level of generality, with material redemptions of personal capital pre-notified to investors.
Redemption mechanics
Redemption process clarity
Redemption frequency, notice period, settlement period, fees and holdbacks together define the practical liquidity of an investor's position.
Redemption frequency, notice period, settlement period, and any redemption-fee or holdback are clearly stated.
Time-to-pay tracking
Disclosed redemption terms must reconcile to observed time-to-pay.
Time-to-pay is tracked and disclosable on request. Material divergence from disclosed terms is investigated and explained.
Equal treatment of redeeming and remaining investors
Where redemptions are paid in part by selling liquid assets, the remaining investors bear the residual illiquidity. Anti-dilution mechanisms (swing pricing, redemption fees credited to fund) are appropriate.
Anti-dilution mechanisms or equivalent protections operate to prevent transfer of illiquidity to remaining investors.
Counterparty risk
Counterparty risk framework
Counterparty exposure (banking, prime brokerage, derivatives) is the residual risk that survives all other risk controls.
A documented framework governs counterparty exposure across categories with limits, monitoring, and escalation.
Collateral management
Collateral arrangements (margin, ISDA CSA, GMRA) determine actual counterparty exposure under stress.
Collateral terms are documented, reconciled daily for liquid asset classes, and stress-tested against adverse moves.
Wrong-way risk identification
Where counterparty exposure correlates with the credit quality of the counterparty (wrong-way risk), the exposure can be larger than nominal under stress.
Wrong-way risk is identified, monitored, and where material, mitigated by limit, collateral, or counterparty diversification.
Leverage and derivatives
Leverage methodology
Leverage measurement methodology (gross, net, regulatory commitment) materially affects the headline figure. Disclosure of methodology and current level is essential.
Leverage methodology (gross, net, regulatory commitment) is disclosed with current and recent levels available to investors. Material changes pre-notified.
Derivative use disclosure
Derivative exposures can be much larger than balance-sheet positions imply; investors require disclosure of categories and notional/effective exposure.
Derivative use is disclosed by category (futures, options, swaps, FX forwards) with notional and effective exposure metrics.
Concentration disclosure
Position concentration (single name, sector, geography) is material risk-relevant disclosure.
Material position, sector, or geographic concentration is disclosed in periodic investor reporting.
Investor reporting cadence and content
A documented reporting cadence and content standard enables investors to monitor the fund and is the operational expression of fund-level transparency.
Investor reporting at a documented cadence (typically monthly or quarterly) covers performance, exposure, leverage, liquidity, and material events.
Public Report sections
- Vehicle summary — jurisdiction, structure, currency, redemption frequency;
- Service-provider chart — administrator, custodian, prime broker(s), auditor;
- Gate / suspension history summary for the trailing five years;
- HWM methodology declaration.
Evidence pathway
| Evidence | Source | Frequency |
|---|---|---|
| Latest audited financial statements | Independent auditor | Most recent annual report |
| Service provider agreements | Manager / administrator / PB | Current versions, redacted |
| Side-letter register | Manager legal / compliance | Current state, redacted |
| Equalisation calculation sample | Administrator | One subscription / redemption cycle |
| Counterparty exposure report | Manager risk function | Most recent month-end |
| Redemption time-to-pay distribution | Administrator | Trailing 12 months |
| Leverage and derivative reporting | Manager risk function | Trailing 12-month sample |
Limitations
- TIB does not opine on investment merit, strategy quality, or expected return;
- Audited financial statements are the authoritative source for the fund's accounting and asset positions;
- Side-letter terms with specific investors are reviewed in redacted form; the identity of counterparties is not assessed.
Module changelog
| Version | Effective | Approved by | Notes |
|---|---|---|---|
| TIB-FRM-HF-1.0 | 16 April 2026 | TIB Standards Committee | Initial publication. 24 binding criteria across 8 themes. |
Normative annex.
| Universal pillar | Module criteria contributing |
|---|---|
| TIB-IS.1 Governance | HF-1, HF-3 |
| TIB-IS.2 Capital & Safeguarding | HF-5, HF-6 |
| TIB-IS.3 Order Handling & Execution | (via TIB-FRM-AM) |
| TIB-IS.4 Payout Integrity | HF-15, HF-16 |
| TIB-IS.5 Risk & Compliance | HF-2, HF-4, HF-9, HF-18, HF-19, HF-20 |
| TIB-IS.6 Disclosure & Conduct | HF-7, HF-8, HF-10, HF-11, HF-12, HF-13, HF-14, HF-17, HF-21, HF-22, HF-23, HF-24 |
Informative annex.
| Document code | TIB-FRM-HF-1.0 |
| Issuing authority | TIB Standards Committee |
| Effective date | 16 April 2026 |
Issuing entity
Stratinova LTD
Cyprus HE475207