A
UK hedge fund group has proposed tougher standards for the industry, including a new body to monitor compliance with voluntary rules.
**The Hedge Fund Working Group**, which includes 14 of the UK’s leading hedge fund managers led by former Bank of England deputy governor Andrew Large, has issued its final report *Best Practice Standards and their Future Development.*
It calls for funds to use third-party asset valuations where possible, emphasising that valuation and portfolio management should at least be handled by separate people.
It also suggests codification of best practice on disclosure, governance, risk and shareholder conduct. In particular, it wants hedge funds to offer more information about the amount of leverage used. Hedge funds submitting to the voluntary code will do so on a “comply or explain” basis.
The report also proposes a Hedge Fund Standards Board (HFSB), funded by the industry, to operate the code. The HFSB would have no regulatory function, nor would it have sanctions available for funds that breach the standards.
The Alternative Investment Management Association (AIMA) has welcomed the report and strongly endorses the group’s desire to see convergence of various hedge fund standards. It has said it will consult with its members on the evolution of the standards by the HFSB and may develop guidance on them, if so required by its members and investors.
**Financial Services Forum Weighs In**
The Chairman of the Financial Stability Forum (FSF), Mario Draghi, said *”As FSF chair, I welcome the issuance today of the Hedge Fund Working Group’s best practice standards. The report represents an important step towards improved disclosure practices and market discipline in this sector. As such, the standards can play a role in helping to enhance resilience and mitigate systemic risk. This initiative, together with the parallel work to develop best practices by a committee established by the US President’s Working Group on Financial Markets, takes forward one of the recommendations that the FSF made in its *Update on Highly Leveraged Institutions* in May 2007; namely that the global hedge fund industry should review and enhance existing sound practice benchmarks for hedge fund managers in the light of expectations for improved practices set out by the official and private sectors.
“I welcome in particular the Hedge Fund Working Group’s recognition that setting the standards needs to be the beginning, rather than the end, of a process. The “comply or explain” expectation on hedge fund managers, the planned establishment of a Hedge Fund Standards Board to maintain the standards and report on conformity by the industry, and the recommendation that this Board should consider areas of convergence with the parallel initiative of the US President’s Working Group, are all useful further steps that can help to ensure that the issuance of standards will translate into enhanced practices globally.”*
The FSF brings together national authorities responsible for financial stability in significant international financial centres, international financial institutions, sector specific international groupings of regulators and supervisors, and committees of central bank experts. It was established by the G7 finance ministers and central bank governors in 1999 to promote international financial stability through enhanced information exchange and international cooperation in financial market supervision and surveillance.