10 October 2007

Hedge fund group issues voluntary standards paper

A group of leading hedge fund executives on Wednesday published recommendations for voluntary standards on governance and disclosure to address criticisms regarding the opaqueness of the fast-growing industry.

The Hedge Fund Working Group (HFWG), headed by Andrew Large, former deputy governor of the Bank of England, called for hedge funds to be more transparent to enhance the industry's reputation and boost confidence in the sector.

The consultation paper comes at a time when the $2 trillion (1 trillion pound) hedge fund industry has come under pressure from some commentators and politicians who favour regulation or more stringent supervision, arguing that the activities of some hedge funds could undermine the strength of the financial system.

"You need to see this as a first step, and a very important step, along a road," Large, former head of the Securities and Investment Board, the predecessor of regulatory body the Financial Services Authority, told Reuters.

"It's the first time a group of hedge fund managers have got together in this way and come up with a pretty serious approach to all the various issues" facing the industry, Large said.

It recommended that hedge funds should adopt clear and robust methods for valuing complex assets and disclose whether they own assets in their portfolio that may be hard to value and could be difficult to sell in an emergency.

It also stated that funds should adopt risk management models that emphasise liquidity in the event of a crisis, to ensure the funds have sufficient cash to meet their obligations.

The group also recommended that regulators should require all investors to disclose whether they have an economic interest in a firm such as through contracts for difference and that hedge funds should not vote on matters regarding firms in which they only possess borrowed stock.

Compliance with the group's recommended standards of practice would only be voluntary, but funds that do not meet them should be required to offer a valid explanation as to why they should not apply them, the group said.

The group said it expected that peer group and market pressure would be likely to encourage adherence to the standards.