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Hedge funds react to critics by agreeing to standards

March 2008

Fourteen large hedge funds have signed up to a set of standards requiring greater transparency and disclosure.

The funds, including Brevan Howard, GLG Partners, Lansdowne Partners, Man Group and Marshall Wace, are all UK-based. Similar standards for US funds are close to being finalized under a separate initiative spearheaded by a presidential working group.

The UK standards were drawn up during the past year by a Hedge Fund Working Group of fund chief executives chaired by the former Bank of England deputy governor Sir Andrew Large. As with private equity firms, which also recently published a set of standards in the UK (EP9, issue 8, p3), the industry has attracted the attention of regulators. Critics say that hedge funds lack transparency, take too many risks, lack accountability and encourage short-termism – criticisms conceded to some extent by the working group.

Hedge funds take many forms but typically invest both long and short, have a high, performance-based fee structure, normally require co-investment by fund managers, and can use futures and other derivatives. About 85 per cent of hedge fund assets are managed in the UK and the US, and the world market is worth an estimated $1500billion (£765bn).

The 14 mainly London-based signatories have agreed to:

make an ‘appropriate level of disclosure’ on strategy and risks
explain how assets have been invested
disclose fees and withdrawal terms
reveal valuation methods
adopt policies to curb market abuse.

They have also agreed not to use borrowed shares to vote at annual meetings – a practice that has caused concern as it allows the funds to exert influence on a company without having a financial stake in a business.

The working group report accompanying the standards does not specifically mention SRI or corporate responsibility, but states that ‘a responsible approach to risk is essential to maintaining confidence in the sector.’ The commitments will be overseen by a Hedge Fund Standards Board. However, the board, initially chaired by Sir Andrew and soon to have trustees, will not police conformity. ‘This is a voluntary, market-led initiative based on disclosure, and it is the investors who can provide the market discipline to ensure these standards are widely adopted,’ said Sir Andrew.

Tom Brown, KPMG’s chief hedge fund adviser in Europe, said he was worried that ‘if someone self-certifies to say they have been complying and it turns out they haven’t ... [then] it will damage the whole reputation of the standards’. However, the Association of British Insurers, representing institutional investors in hedge funds, welcomed them as ‘a start’.

Switzerland-based Sustainable Asset Management has formed a business unit to develop ways for private and institutional SRI investors to invest in hedge funds and other alternative investment vehicles. The unit will be headed by Reto Kuhn, former general manager of Swissair’s pension fund.
 




Hedge Fund Working Group | UK & NI Ireland | Codes of conduct

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