01 February 2008

Summit backs hedge funds' proposals on transparency

European leaders attending this week's "mini-summit" on the credit crunch have welcomed a report issued by some of the UK's biggest hedge fund managers that seeks to establish best-practice standards for the industry. "Market orientated solutions are crucial to achieving the necessary improvements in business operations and in interactions between market participants," the leaders wrote in a statement.

"We therefore welcome the voluntary best practice standards presented by the London-formed Hedge Fund Working Group on January 23 in the context of the Financial Stability Forum's five recommendations on hedge funds."

The standards, released last week after seven months of consultations, encourage fund managers to have their portfolios independently valued and to set out clearly all the risks their investments carry.

Managers who sign up to the initiative should be transparent over fees, investment risks and relationships with lenders and prime brokers, according to the working group, which is led by former Bank of England deputy governor Sir Andrew Large.

Portfolio risks should be disclosed quarterly and funds should ideally use an external company to value investments. If that is not possible, in-house valuation must be a completely separate function to avoid conflicts of interest.

A group called the Hedge Fund Standards Board will oversee the standards. Managers who sign up must comply or explain why they cannot meet them, but there will be no enforcement.

Separately, the summit's participants agreed to strengthen national financial regulators and increase international cooperation to tackle the credit crisis.

The leaders, who included UK Prime Minister Gordon Brown and French President Nicolas Sarkozy, said they will seek to increase investors' understanding of the risks associated with structured products by raising the information content of credit ratings. Potential conflicts of interest for ratings agencies should also be addressed, according to the statement.

Audit firms and regulators should provide clear guidance on valuation and disclosure of off-balance-sheet vehicles, the statement added.

By Tom Fairless, Financial News

© Graham Bishop