The Hedge Fund Working Group, representing leading hedge fund managers based mainly in the UK, has published a consultation document that puts improved disclosure to investors at the heart
The Hedge Fund Working Group, representing leading hedge fund managers based mainly in the UK, has 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 the Financial Stability Forum, as well as other concerns about the hedge fund industry.
The working group, which comprises 14 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.
In addition to the members of the working group, 34 other leading London-based hedge fund managers have agreed to support the establishment of this industry-led initiative, which is also supported by the international trade body for the industry, the Alternative Investment Management Association.
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 UK FSA principles, are voluntary and would operate on a ‘comply or explain’ basis.
Sir Andrew Large, chairman of the HFWG, says: ‘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.’
In a statement, Aima has welcomed the issue of the consultation paper, saying that the initiative represents a substantial undertaking by a number of the UK’s largest hedge fund managers, most of which are also members of the association.
‘The initiative builds upon and is a welcome endorsement of the substantial body of work that Aima has developed with and for the hedge fund industry in the UK and internationally over the last 10 years,’ the association says. ‘The group’s emphasis on developing key areas such as risk management and disclosure is also seen as extremely timely and of particular importance.’
Aima says it is vital that all key stakeholders, including its members and investors, review the consultation document and make use of the opportunity to comment to the working group on the report’s recommendations. Adds deputy chief executive Andrew Baker: ‘Aima looks forward to responding to this document and working with the UK Hedge Fund Working Group on the areas outlined.’
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, and 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 contracts for differences; managers should also develop proxy voting policies and they should not vote where they have no underlying economic interest in a company.
The members of the HFWG 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.
In addition to the members of the working group, 34 other leading London-based hedge fund managers have agreed to support the establishment of this industry-led initiative, which is also supported by the international trade body for the industry, the Alternative Investment Management Association.
The terms of reference of the working group were to explore a range of issues covering in particular valuation, disclosure of financial information and risk management. The working group will consult widely with interested parties in the industry, investors and suppliers. Responses are now invited on the consultation document and the consultation period will run until 14 December. The HFWG intends to issue its final report in January 2008.
