The Hedge Fund Working Group (HFWG), representing leading hedge fund managers based mainly in the UK, has today published a consultation document that puts improved disclosure to investors at the heart of best practice standards for the industry.
The report addresses issues about financial stability raised by the G8 and Financial Stability Forum as well as other concerns about the hedge fund industry.
The new standards focus particularly on the areas of valuation, risk management, disclosure and fund governance. The working group has also recommended that hedge fund managers disclose more information about themselves on their websites and that more information about the industry is made available collectively to the wider public.
The best practice standards, which are framed within the context of FSA principles, are voluntary and would operate on a 'comply or explain' basis.
Sir Andrew Large, chairman of the HFWG, said: "This is a significant step in that it is the first time a group of leading hedge funds have come together to give real substance as to how they will comply with FSA principles.
"It shows that the industry recognises its responsibilities as a significant force in the financial system.
"The reason disclosure is at the core of this exercise is because it gives investors, lenders and other stakeholders the information they need to make better-informed decisions. Transparency leads to greater understanding and confidence."
The main best practice standards in the consultation document include:
- On valuation, managers should ensure that the methodology for valuing complex assets is robust and transparent, that the presence of illiquid and hard-to-value assets in the portfolio is disclosed as are any conflicts of interest in the valuation process.
- On risk management, managers should develop an approach to dealing comprehensively with risk, with particular emphasis on liquidity, so that they are able to cope with unexpected events and stresses.
- On fund governance, managers should ensure that adequate structures are in place to handle potential conflicts between managers and investors.
- On activism, it is recommended that regulators require all investors to disclose their interest in companies through holding derivatives such as CFDs; managers should also develop proxy voting policies and they should not vote where they have no underlying economic interest in a company.
The HFWG, which comprises 14 of the leading hedge fund managers, proposes setting up a board of trustees that would assume responsibility for the standards and for updating them in the future. It is hoped that the standards will be further developed over time in a global context.
Responses are now invited on the consultation document and the consultation period will run until 14th December 2007. The HFWG intends to issue its final report in January 2008.
In addition to the members of the HFWG other leading London-based hedge fund managers have agreed to support the setting up of this industry-led initiative. The initiative is also supported by the international trade body for the industry, the Alternative Investment Management Association (AIMA).