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Hedge funds propose voluntary code to resist pressure for regulation

Date: Wednesday, June 20, 2007
Author: Hedgeweek.com

A group of 13 mostly London-based hedge fund managers has proposed establishing a working group to examine the possibility of a voluntary code of practice for the industry amid calls from politicians on both sides of the Atlantic for greater regulation and more stringent transparency requirements for the industry.

The group has reportedly invited 35 other European large fund managers to sign up to the initiative, which would examine issues such as valuation, disclosure and risk management and propose some kind of agreement on voluntary standards.

According to the Financial Times, the hedge fund managers involved are Brevan Howard, Brummer & Partners, Centaurus Capital, Cheyne Capital, CQS, GLG, Gartmore, Landsdowne Partners, London Diversified, Man Group, Marshall Wace, Och-Ziff and RAB Capital. All are based in London apart from Brummer (Stockholm) and Och-Ziff (New York).

The working group will reportedly be chaired by Sir Andrew Large, until last year a deputy governor of the Bank of England responsible for financial stability and previously the chairman of the Securities and Investments Board, one of the forerunner organisations to the UK regulator, the Financial Services Authority.

Last November Strong became chairman of ME Tops, a Guernsey-domiciled closed-ended fund established last year by Marshall Wace that raised USD2bn when it was listed on the Euronext Amsterdam exchange.

The initiative comes at a time when Jean-Claude Trichet, president of the European Central Bank, has been warning that hedge funds require greater scrutiny lest they pose a threat to the stability of the global financial system, and US Senator Chuck Grassley has tabled a legislative amendment that would require hedge funds to register with the US regulator, the Securities and Exchange Commission.

If approved, the legislation would reinstate a registration requirement imposed by the SEC on hedge funds in February last year but struck down by the courts four months later as going beyond the regulator's statutory authority.

The argument over supervision of hedge funds has also become conflated to some degree with a debate about the taxation of profits earned by partners in private equity funds. Lobbying groups, politicians and even some buyout industry members have suggested that partners' shares of carried interest, effectively a performance fee earned by private equity managers, should be taxed as income rather than at the sometimes much lower rates applicable to capital gains.

The focus on hedge fund regulation has been intensified by repeated but largely unsuccessful efforts by Germany to get the issue on the agenda of the G8 summit for leaders of large industrialised countries.

Following the G8 meeting in Heiligendamm earlier this month, the post-summit statement merely said: 'The assessment of potential systemic and operational risks associated with [hedge fund] activities has become more complex and challenging. Given the strong growth of the hedge fund industry and the increasing complexity of the instruments they trade, we reaffirm the need to be vigilant.'

A report commissioned by the US government recently found that there was no need for any major change in the way hedge funds and their managers were supervised, and in the UK an FSA review came to a similar conclusion.