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Hedge Fund Working Group unveils valuation and risk management standards

The Hedge Fund Working Group, established by 14 leading hedge fund managers based mainly in the UK, has published best practice standards for hedge fund managers following consultation with the industry and other interested parties.

The publication of the standards has been welcomed by the Alternative Investment Management Association, which will be involved in implementing them, and follows the issuing of a consultation document by the group last October.

The body of voluntary standards includes recommendations for managers to adopt an independent process for valuing portfolios and to put in hand robust governance of funds, in order to handle conflicts of interest between managers and investors.

The report also recommends enhanced disclosure to investors and urges managers to create a comprehensive risk management framework, an important consideration in the context of financial stability.

The Hedge Fund Working Group was set up last year in response to concerns about both the growing impact of hedge funds and financial stability. The standards aim to address these and other issues through increased disclosure to investors and other counterparties.

'Our final report is the result of extensive consultation within the financial industry, which has helped us to refine the standards and in some important respects make them more rigorous,' says the group's chairman, Sir Andrew Large

'Now it is up to investors to help take this forward. This is a voluntary, market-led initiative based on disclosure. It is the investors who can provide the market discipline to ensure these standards are widely adopted.' Compliance with the standards will be voluntary and will operate on a comply or explain basis.

A Hedge Fund Standards Board is being set up to act as custodian of the standards. The board's trustees will be responsible for updating the standards in the future and for encouraging convergence with the similar initiative currently being taken by the President's Working Group in the US.

Members of the group will initially act as interim trustees of the new Hedge Fund Standards Board and Sir Andrew Large will be interim chairman until permanent trustees are appointed. Aima chairman Christopher Fawcett will become a trustee.

According to the working group, Aima will also have a key role in developing aspects of the recommendations included in the report and in acting as a channel for guidance for the industry as well as consultations on future changes.

The association has welcomed the publication of the report, describing it as 'a substantial undertaking by leading hedge fund managers [that] offers high-level thought leadership on key issues surrounding the industry.

Aima notes that the report endorses its own work in defining and promoting best practice standards for the hedge fund industry and says it will work with the Hedge Fund Standards Board to mesh the standards with its own recommendations.

The association shares the working group's desire to see convergence of the various sets of standards drawn up for the hedge fund standards and has expressed its commitment to leading these efforts, while not underestimating the challenges inherent in doing so. It will consult with its members on the development of the standards by the board and may develop guidance on them if called upon to do so by its members and investors.

'This report is a substantial achievement by this group of leading managers, particularly given the time frame and the market conditions,' says Aima deputy chief executive Andrew Baker. We believe this initiative is the right approach for the hedge fund industry.

'The working group's endorsement of Aima's leadership and its substantial body of work in industry practices is welcomed, and we are very much looking forward to working with the board and the rest of the industry to oversee convergence of standards.'

The working group was set up last July to address issues raised about financial stability by the G8 and the Financial Stability Forum as well as other concerns about the hedge fund industry. Its terms of reference were to explore a range of issues covering in particular valuation, disclosure of financial information and risk management.

The working group received more than 75 written submissions from interested parties in the industry, its investors and suppliers during the two-month consultation period and held 26 face-to-face discussion sessions.

The members of the group are Nagi Kawkabani, co-chief executive, Brevan Howard; Klaus Jäntti, chief executive, Brummer & Partners; Bernard Oppetit, chief executive, Centaurus Capital; Stuart Fiertz, president, Cheyne Capital; Michael Hintze, chief executive, CQS; Jeffrey Meyer, chief executive, Gartmore; Manny Roman, co-chief executive, GLG; Paul Ruddock, chief executive, Lansdowne Partners; Rob Standing, founding partner, London Diversified; Stanley Fink, deputy chairman, Man Group; Paul Marshall, chairman, Marshall Wace; Michael Cohen, managing partner and chief investment officer for Europe, Och-Ziff Capital Management; Michael Alen-Buckley, chairman, RAB Capital; and George Robinson, founding partner, Sloane Robinson.

The London-centric nature of the working group reflects the city's dominant role for hedge fund management in Europe. According to EuroHedge, UK-based hedge fund managers had USD415 billion of assets under management at the end of June last year, some 80 per cent of the USD539bn in total assets managed or invested in Europe.

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