Hedge Funds: Built to Last or Doomed to Fail? The Role of Independent Governance in Ensuring Long-Term Success
by Chris Chan, Managing Partner at Alto Cognito and Certified Chair™

Hedge fund collapses rarely happen overnight. More often than not, they unravel due to years of poor governance, unchecked risk-taking, and leadership cultures resistant to oversight. Billions have been lost—not from bad investments but governance failures. As capital allocators demand greater accountability, the hedge fund industry faces a reckoning: reform or risk losing access to institutional capital.

In the competitive hedge fund landscape, short-term profits often take precedence over sustainable strategies, creating a natural tension between risk and governance. Independent oversight, therefore, becomes essential—not just as a regulatory requirement but as a critical strategic advantage. Firms that fail to appreciate this risk more than regulatory sanctions—they risk permanent reputational damage, investor withdrawals, and eventual collapse.

The Breakdown of Governance at Segantii Capital

Segantii Capital’s downfall illustrates how prolonged governance shortcomings can culminate in crisis. Once a significant player in Asian block trading, Segantii faced significant turmoil in 2024 following charges from Hong Kong’s Securities and Futures Commission (SFC). The charges relate to alleged insider trading involving trades made in Esprit Holdings shares in 2017, which reportedly only produced modest financial gains but had considerable reputational repercussions.

The allegations remain unproven, and Segantii, its founder and CIO Simon Sadler and trader Daniel La Rocca deny any wrongdoing. However, the case has highlighted deeper structural vulnerabilities within the firm. On paper, Segantii possessed all the necessary layers of compliance oversight—Responsible Officers (ROs), compliance committees and systems, risk committees, internal compliance officers, and external compliance consultants—yet these mechanisms failed to serve as effective safeguards against governance failures. Despite these formal structures, decision-making authority remained highly concentrated, enabling unchecked risk-taking. Furthermore, Segantii’s internal culture, characterised by aggressive leadership and centralised control, discouraged dissent and internal scrutiny. Compliance teams were largely reactive, intervening only after risks had materialised rather than proactively identifying and mitigating governance threats.

As early as 2021, major banks—including Bank of America, Citigroup, Goldman Sachs, and Morgan Stanley—began distancing themselves from Segantii, citing concerns over its trading practices. Yet, these early warning signs were seemingly disregarded internally. By the time the SFC formally filed charges in 2024, hindsight revealed a clear pattern: risk signals from financial institutions had been ignored, and the absence of meaningful governance oversight had allowed issues to escalate unchecked. The subsequent wave of investor withdrawals left Segantii with no option but to wind down operations and return capital, reinforcing the need for proactive governance rather than reactive compliance.

Block Trading and the Insider Trading Dilemma

Block trading, involving large transactions negotiated privately and executed swiftly, is a critical strategy for many hedge funds, offering significant profit potential. However, the nature of these transactions makes them susceptible to ethical and regulatory grey areas. Information asymmetry, pre-wall-cross discussions, and the blurred lines between legitimate market-sounding and illegal insider information make governance particularly challenging.

The Segantii case highlighted these vulnerabilities. Block trading’s competitive nature often pushes traders to the boundaries of legality. Compliance teams, traditionally reactive and limited in authority, struggle to monitor and mitigate risks inherent in fast-moving, high-pressure transactions. This demonstrates why traditional compliance alone is inadequate, necessitating independent governance structures capable of challenging a firm’s culture and strategic direction before crises emerge.

Cases involving insider trading enforcement, such as Galleon Group and SAC Capital in the US, further illustrate the limitations of traditional compliance frameworks. These firms had substantial compliance resources yet failed to prevent insider trading, leading to devastating consequences for investors, employees, and stakeholders. Something more fundamental than compliance frameworks is required—an independent, strategically positioned governance entity.

The Compliance Paradox: Understanding the Harrington Effect

Regulatory oversight in the hedge fund industry has expanded significantly, yet governance failures persist. This paradox—where increasing compliance requirements do not translate into more substantial risk mitigation—is best explained by what governance scholars call the Harrington Effect. As regulatory complexity grows, firms become preoccupied with procedural adherence, focusing on box-ticking exercises rather than embedding genuine governance safeguards into their operations.

By their nature, hedge funds thrive on speed and flexibility; however, compliance frameworks often devolve into bureaucratic layers that distract from genuine risk oversight. The result? A system in which rules exist but fail in practice. Rather than fostering independent decision-making, many compliance structures promote reactive governance, intervening only when risks have already materialised rather than proactively addressing vulnerabilities.

This issue is particularly acute in hedge funds operating across multiple jurisdictions. Firms engage in regulatory arbitrage by strategically structuring their operations in regions with lighter oversight and exploiting inconsistencies in global compliance standards. Meanwhile, regulators—such as the SEC in the US, the SFC in Hong Kong, and the FCA in the UK—intensify enforcement actions; however, their interventions often come too late after governance failures have already eroded investor confidence and market stability.

The issue is not that regulations are unnecessary; compliance alone does not constitute governance. Without structural reforms that integrate independent oversight, leadership accountability, and proactive risk identification, hedge funds will continue to repeat the governance failures of the past. The lesson is clear: firms that regard compliance as a regulatory formality rather than an embedded safeguard will remain vulnerable to crises, investor distrust, and regulatory intervention.

As hedge funds navigate growing regulatory scrutiny, it is evident that compliance frameworks alone are inadequate. What is required is a structural safeguard—one that guarantees independent oversight while maintaining strategic flexibility. Advisory boards (Abs) offer a distinct advantage in this regard.

The Case for Advisory Boards: A Strategic Imperative, not a Constraint

Hedge funds thrive on agility, autonomy, and rapid decision-making—factors often make fund managers resistant to external oversight. Some argue that ABs hinder decision-making, dilute strategic control, and introduce unnecessary bureaucracy into a fast-paced industry. However, this perspective increasingly conflicts with market realities. In today’s environment, independent governance is not a burden but a strategic necessity.

The reality is that hedge funds can no longer afford to operate without structured oversight. Independent governance is now an expectation rather than an option. Hedge funds that embed structured governance into their decision-making are better positioned to anticipate risks, build investor trust, and sustain long-term performance. The role of advisory boards is not to interfere but to provide external oversight that ensures resilience in a rapidly evolving market.

Advisory boards also play a crucial role in enhancing investor confidence. Institutional allocators—sovereign wealth funds, pension funds, and significant endowments—increasingly demand structured oversight before committing capital in a financial environment where governance standards influence capital flows as much as performance metrics. Hedge funds that regard advisory boards as an unnecessary constraint risk losing their competitive edge.

In simple terms, hedge funds must shift the perception of governance from a mere regulatory formality to a fundamental strategic function. Firms that successfully incorporate advisory boards will enhance internal decision-making and risk management, positioning themselves as industry leaders in a world where governance failures are no longer tolerated.

Why Compliance Alone Is Not Enough

Compliance frameworks alone are insufficient. Cases like Segantii illustrate that governance failures persist despite substantial investment in compliance structures. The issue resides not in the presence of oversight mechanisms but in their effectiveness. Compliance functions often operate nominally, lacking the authority, independence, or influence to challenge leadership decisions before risks escalate. Without independent governance capable of identifying systemic vulnerabilities early on, hedge funds remain susceptible to the same cycles of concentrated decision-making, cultural opacity, and reactive governance that have led to previous collapses.

Governance failures do not emerge overnight; they accumulate over time. Firms that treat compliance as a procedural necessity rather than an embedded safeguard ultimately find themselves vulnerable when the next crisis hits. The question is not whether oversight structures are in place but whether they function as intended—before external intervention becomes inevitable.

Four critical flaws consistently undermine compliance efforts:

• Leadership Concentration Risks – When decision-making is concentrated in the hands of a few, internal concerns are easily dismissed. Compliance teams may exist, but their role becomes performative rather than preventative without the authority to challenge senior leadership.

• Cultural Blind Spots – High-pressure, performance-driven environments frequently discourage scrutiny. Risk controls are perceived as obstacles rather than safeguards in firms where aggressive trading strategies are prioritised above all else. This culture normalises excessive risk-taking, permitting governance red flags to remain unnoticed or ignored.

• Regulatory Arbitrage – Hedge funds function across various jurisdictions, strategically relocating operations to areas with weaker oversight. By taking advantage of regulatory inconsistencies, firms can sidestep stricter scrutiny, resulting in governance enforcement that is fragmented and reactive rather than comprehensive.

• Delayed Enforcement – By the time regulators intervene, investor harm has already occurred. Compliance frameworks, intended to identify and mitigate risks before they escalate, frequently operate as mere box-ticking exercises instead of proactive mechanisms. Without structural governance reforms, regulatory action remains an afterthought rather than a safeguard.

Ultimately, compliance alone does not equate to governance. Without independent oversight that challenges leadership, reinforces ethical boundaries, and ensures compliance mechanisms serve their intended purpose, hedge funds remain vulnerable to the same structural failures that have brought down firms before them.

Proven Governance Models: Where Advisory Structures Work

Sceptics argue that hedge funds, by their very nature, cannot integrate structured oversight without compromising performance. They contend that rigid governance frameworks stifle agility and slow decision-making in an industry where speed and discretion are paramount. Yet, across multiple financial sectors—private equity, banking, and institutional asset management—advisory structures have successfully enhanced governance without hindering operations. These models demonstrate that independent oversight strengthens long-term stability while preserving strategic flexibility when designed effectively.

• Limited Partner Advisory Committees (LPACs) in Private Equity – LPACs serve as investor-driven oversight bodies that assess conflicts of interest, governance practices, and fund strategy. While they do not dictate investment decisions, they wield significant influence over fund governance, mainly when ethical concerns or regulatory scrutiny arise. Their role in promoting transparency and investor alignment makes them a compelling precedent for hedge fund governance structures.
• Risk and Conduct Committees in Banking – Large financial institutions such as JPMorgan Chase have established risk committees to oversee trading culture, ethics, and long-term exposure to systemic risks. These committees have played a crucial role in preventing repeated governance failures by ensuring risk-taking aligns with investor and regulatory expectations. The effectiveness of these committees highlights that independent oversight is not an impediment but a necessary safeguard against financial misconduct.
• Hedge Fund Governance Models: Bridgewater Associates, BlackRock, and PIMCO – Bridgewater Associates, one of the world’s largest hedge funds, operates under a principles-driven governance framework that reinforces strategic discipline while maintaining investment flexibility. Similarly, BlackRock and PIMCO have embedded governance oversight mechanisms that allow them to balance high performance with long-term investor protection. Their ability to integrate structured oversight while sustaining competitive returns proves that governance need not come at the expense of operational agility.

These models challenge the perception that independent oversight undermines performance. Instead, they show that governance structures—when adequately designed—bolster strategic resilience, investor confidence, and regulatory credibility while enabling firms to retain their competitive edge. Hedge funds resistant to these models may increasingly face scrutiny from investors demanding more substantial governance standards.

Collaboration, Not Conflict

The most effective advisory boards function as strategic partners rather than external enforcers. Instead of interfering with individual trades or imposing strict oversight, advisory boards provide a higher-level governance role, assisting hedge funds in aligning risk-taking with long-term sustainability, investor expectations, and ethical responsibility. Their purpose is to enhance decision-making, not hinder it.

By providing leadership with an external perspective on risk management, governance best practices, and regulatory trends, Advisory Boards assist hedge funds in identifying blind spots before they mature into crises. They serve as sounding boards, challenging leadership when necessary while reinforcing strategic discipline in an industry where unchecked decision-making has repeatedly led to failures.

To foster a constructive and effective partnership, advisory boards must be designed to complement, not constrain, hedge fund management. Their success depends on the following principles:

• Strategically Engaged—ABs should consistently engage with fund managers, ensuring that governance oversight remains aligned with strategy rather than becoming a reactive afterthought.
• Authority-Backed—Without clear influence, authority-backed entities may become more symbolic than substantial. They must have structured authority to effectively challenge strategic decisions and ensure their recommendations are taken seriously.
• Risk-Focused – ABs must be prepared to evaluate aggregated trading risks, cultural warning signs, and potential regulatory weaknesses, ensuring that governance oversight goes beyond mere compliance with box-ticking requirements.
• Operationally Compatible – Effective ABs do not hinder decision-making. Instead, they are designed to enhance strategic agility by ensuring leadership has access to external governance perspectives while maintaining responsiveness to market shifts.

The most successful hedge funds are not those that resist oversight but those that strategically leverage it. When properly integrated, advisory boards serve not merely as a bureaucratic obligation but a governance advantage—helping firms build credibility with investors, strengthen risk controls, and reinforce leadership accountability before regulatory scrutiny necessitates their action.

Investor Activism: Raising the Governance Standard

Institutional investors are not only advocating for stronger governance but also demanding it. Sovereign wealth funds, pension funds, and endowments increasingly withhold capital from funds that lack independent governance oversight, rendering robust governance a best practice and a prerequisite for institutional investment. The message is clear: hedge funds that neglect to prioritise governance will progressively exclude themselves from the most essential capital markets.

Investor-led expectations must reshape the hedge fund landscape. Instead of viewing advisory boards as an unnecessary constraint, fund managers should see them as a strategic asset—enhancing credibility, mitigating risk exposure, and securing long-term institutional capital inflows. Firms that proactively integrate strong governance structures are more appealing to investors, counterparties, and regulators, ensuring sustainable growth stability.

The Practical Reality: Advisory Boards as a Competitive Advantage

When structured effectively, advisory boards provide hedge funds with distinct strategic advantages:

• Early Detection of Emerging Risks – Advisory Boards provide an external viewpoint, pinpointing blind spots before they escalate into crises. Their capacity to assess risks independently bolsters internal decision-making and resilience.

• Reputational Protection – Independent oversight promotes transparency, integrity, and accountability, reinforcing credibility with investors, regulators, and counterparties—particularly in a market where trust is vital.

• Long-Term Strategic Alignment – ABs encourage managers to balance short-term gains with long-term sustainability, ensuring that risk, strategy, and ethical considerations remain aligned with investors’ expectations.

While scepticism regarding advisory boards persists in specific industry sectors, an increasing number of firms recognise their strategic value. Instead of hindering operational effectiveness, advisory boards enhance strategic agility by embedding governance and compliance as proactive safeguards rather than reactive obligations.

The Segantii case exemplifies the consequences of insufficient independent oversight: unchecked strategies, opaque leadership structures, and a lack of governance safeguards have contributed to its alleged governance failures. Hedge funds that regard advisory boards as an essential governance tool risk encountering similar scrutiny, regulatory intervention, and investor distrust.

Ultimately, the true value of advisory boards lies in compliance and their ability to shape a firm’s strategic direction. Hedge funds that embrace independent oversight will gain a competitive edge, cultivate institutional trust, and position themselves for sustained success in an industry where governance is not merely optional but essential.

Best Practices for Implementing Advisory Boards: More Than a Checklist, A Competitive Edge

Too often, firms view advisory boards (ABs) merely as a compliance formality—an obligation to appease investors rather than a governance tool that creates genuine strategic value. The result? Boards that exist only in name lack influence, engagement, or meaningful authority. Institutional investors no longer ask whether hedge funds have advisory boards—they demand proof that these boards provide real oversight and governance impact.  Without a structured mandate, real authority, and direct access to leadership, an advisory board is nothing more than window dressing.

The hedge funds that maximise value from their ABs do not simply follow best practices—they incorporate governance into their decision-making DNA. This requires moving beyond a checklist mentality and ensuring that ABs are:

• Integrated into the Firm’s Governance Model – An AB is only effective if it has structured engagement with leadership. This entails regular interaction with fund managers, access to risk reports, and the capability to flag concerns before they escalate into crises.
• Independent in Composition, Objective in Oversight – Board members must maintain independence, without any financial ties to management, to provide impartial governance instead of merely endorsing executive decisions.
• Empowered with Real Influence – ABs that merely provide background advice offer limited value. To be effective, they must have clear escalation pathways, ensuring their concerns are taken seriously at the highest levels of decision-making.
• Focus on Strategic Risk, Not Daily Operations – An AB should not interfere with trading decisions but should steer the firm’s risk posture, ethical boundaries, and long-term governance strategy.
• A Signal to Investors, Not Just Regulators—Hedge funds that regard ABs as instruments for bolstering investor confidence rather than merely regulatory requirements will be better positioned to attract institutional capital.

Firms that fail to embed these principles risk establishing performative advisory boards instead of effective ones. The distinction between a superficial governance structure and a functional oversight mechanism is pronounced—one is merely cosmetic, while the other serves as a competitive advantage. Hedge funds that get this right will not only comply with governance standards; they will also outperform those that do not.

Conclusion: A New Governance Imperative

The hedge fund industry is at a critical juncture. Governance reform is not merely a competitive advantage but an operational necessity. Firms that take a proactive approach to oversight will not only mitigate risk but also enhance investor trust, foster long-term stability, and protect against reputational damage. Those that resist will face increasing pressure from investors tightening capital requirements, regulators intensifying scrutiny, and markets that are far less forgiving of governance failures. In short, hedge funds that fail to act now soon find governance imposed upon them under far less favourable conditions.

Independent advisory boards present a pragmatic and strategic solution instead of a bureaucratic burden. When well-structured, they offer essential oversight on risk, leadership culture, and trading strategies—without encroaching on daily investment decisions. The world’s largest institutional investors are already integrating governance standards into capital allocation decisions, rendering independent oversight an expectation rather than an afterthought.

Hedge funds now face a clear choice: embrace independent governance to strengthen resilience or risk having their governance dictated by regulators and investors. Those who act promptly will secure operational integrity, regulatory credibility, and long-term investor confidence. Those who postpone will discover that governance is not a matter of if but when—and under what conditions.

Past governance failures were not inevitable; they arose from avoidable structural weaknesses and missed opportunities for reform. Hedge funds that regard governance as a strategic safeguard rather than a compliance burden will position themselves as leaders in an increasingly scrutinised market. Governance will define the future of hedge funds. Those who embrace independent oversight will lead the industry—those who resist will be left behind.

For further information or to discuss, contact Chris Chan:
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Disclaimer: This views expressed herein are solely the views of the author.