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Adoption of hedge fund best practice standards drives investment, says KPMG

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When making investment allocations, eight out of 10 pension funds would favour a hedge fund manager that complied with the best practice standards recently outlined by the Hedge Fund Worki

When making investment allocations, eight out of 10 pension funds would favour a hedge fund manager that complied with the best practice standards recently outlined by the Hedge Fund Working Group, according to a survey of investors commissioned by KPMG.

‘These results provide a compelling case for managers to sign up to the standards, particularly if they are expecting to attract institutional money,’ says Tom Brown, European head of KPMG’s investment management and funds practice. ‘Markets may go up or down, but pressure on managers for increased investor assurance and transparency will only go up.’

Last year 14 of the UK’s largest hedge fund managers formed the Hedge Fund Working Group with the aim of establishing a benchmark of best practice in the industry and to promote self-regulation.

In January this year the group published a report outlining 28 principles for best practice in the areas of disclosure, risk management, valuation, shareholder conduct and fund governance, and created the Hedge Funds Standards Board to act as their custodian.

The 14 original signatories have committed to ‘comply or explain’ by the end of this year. More than half of the pension funds surveyed say they will require hedge fund managers to comply with the standards within three years.

KPMG commissioned an independent research firm to interview pension funds, funds of hedge funds and investment consultants with total assets under management or advice of around USD400bn.

The survey, which was conducted last month, also found that pension fund asset allocations to hedge funds are expected to double within three years from an average of 4 per cent to 8 per cent.

More than 50 percent of investors said that self-certification was appropriate for the Hedge Fund Working Group standards, but that they would continue to seek independent third-party validation for greater assurance.

Valuation, followed by risk management and disclosure, was cited by survey respondents as the most important issue to be addressed by the standards. Nine out of 10 investors categorised asset valuation as very important, the highest response rate in the survey.

However, investors did not see the working group standards as the sole arbiter of best practice for hedge funds, also describing the Alternative Investment Management Association’s sound practices guide and Global Investment Performance Standards as very important or quite important.

‘The hedge fund industry is at a turning point,’ says Giles Drury, a senior manager with KPMG’s alternative investment group. ‘Managers can voluntarily choose to adopt the best practice standards proposed by the Hedge Fund Working Group and continue to attract significant capital inflows from institutions, or ignore the recommendations and face the very real threat of more stringent regulation being imposed upon them.’

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