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Hedge Fund Working Group recommends more disclosure

Date: Thursday, October 11, 2007
Author: James Langton, Investment Executive

A group representing leading hedge fund managers based mainly in the United Kingdom has published a consultation document that proposes improved disclosure for the industry.

The Hedge Fund Working Group (HRWG) was launched in June 2007 to review existing standards for the hedge fund industry and make recommendations for strengthening where necessary.

The new standards focus particularly on valuation, risk management, disclosure and fund governance. The working group has also recommended that hedge fund managers disclose more information about themselves on their Web sites and that more information about the industry is made available collectively to the wider public. The best practice standards are voluntary and would operate on a ‘comply or explain’ basis.

The main best practice standards in the consultation document include:
  • ensuring that the methodology for valuing complex assets is robust and transparent, 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;
  • that managers should develop an approach to dealing comprehensively with risk, with particular emphasis on liquidity;
  • managers should ensure that adequate structures are in place to handle potential conflicts between managers and investors; and
  • that regulators require all investors to disclose their interest in companies through holding derivatives; managers should also develop proxy voting policies and they should not vote where they have no underlying economic interest in a company.
“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,” said Sir Andrew Large, chairman of the Hedge Fund Working Group. “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,” Large added.

The HFWG, which comprises 14 of the 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.

Responses are invited on the consultation document by December 14. The HFWG intends to issue its final report in January 2008.

In addition to the members of the HFWG other leading London-based hedge fund managers have agreed to support the setting up of this industry-led initiative, as has the Alternative Investment Management Association.