Investors in UK-managed hedge funds could be charged a levy to pay for a new standard-setting body for the industry, it was proposed yesterday.

Sir Andrew Large, chairman of the Hedge Fund Working Group, unveiled proposals for a new body that would set and police standards for the UK industry.

It would be financed by a levy on hedge fund managers and/or their clients, “although the industry was likely to pay most of the cost”, Sir Andrew told The Times.

He said London could benefit from the regime, which would act as a kite-mark of good quality.

“High standards do cost a bit, but they are extremely good for confidence and business,” Sir Andrew said.

Hedge fund managers signing up to the proposed code would have to meet minimum standards of transparency, disclosure and good practice – or explain their failure to do so in a similar system to the boardroom standards applied to London-listed companies.

The working group has the backing of 14 of London’s biggest hedge fund managers, including GLG, Lansdowne Partners, Man Group and Marshall Wace. London accounts for the bulk of the world’s hedge fund industry outside the United States.

Among the more controversial proposals, hedge fund managers would have to use an external valuer or put in place safeguards to ensure the impartiality of internal valuers.

They would also be expected to publish details of their individual managers’ strategies, funds under management, regulatory status and history.

Abiding by the new regime could be a culture shock for this most private of industries. Sir Andrew said members of the working group recognised that the industry had grown too big and in-fluential to remain so secretive.

On activism, the working group recommended that regulators should require all investors, including hedge funds, to disclose interests in companies held through derivatives such as contracts for difference.

It was right that companies should know who their owners were, Sir Andrew said, but he rejected the suggestion that short-selling hedge funds should also be unmasked.

The working group also set out standards obliging managers to disclose how they valued illiquid and other difficult-to-value assets and admit to any conflicts of interest in the valuation process.

Hedge fund managers would be obliged to tell investors the proportion of their portfolios in illiquid assets and the extent to which valuations were based on computer models rather than actual trading prices.

On risk controls, it paid particular attention to liquidity in the wake of this summer’s credit crunch.

Sir Andrew acknowledged that the new regime would be more easily adopted by large hedge fund managers and that it could be more burdensome for smaller firms, arguing that was why the proposals were being put out to consultation.

Pressure from industry peers and informed investors such as funds-of-hedge funds would ensure that hedge fund managers abided by the proposed new standards.

The standard-setting body, which would be run by a board of trustees, would have no power of sanction except for the power to publicly comment on nonconformity to the code.

Trustees would need to have the gravitas and experience to command respect for their independence.

The Hedge Fund Working Group was set up in June in response to growing concern among hedge fund managers that they could be subjected to a regulatory clampdown unless they changed their ways and image.

Andrew Shrimpton, a partner at the consultants Kinetic Partners and a former head of hedge fund manager regulation at the Financial Services Authority, said the report was very thorough and comprehensive.

“It may help head off heavy-handed regulation from the G8,” he said.

He added that it would play well with hedge fund managers trying to attract mandates from institutional investors. They tend to be more concerned with compliance and standards than wealthy individuals.

However, smaller hedge funds would find it harder to meet the higher standards, he said.

Ten things you need to know about hedge funds

— The hedge fund industry was pioneered by Alfred Winslow Jones in 1949. He worked for nearly 16 years in almost total secrecy until 1966 when Fortune magazine chanced upon his operation and highlighted his success. The article prompted a flood of immi-tators and by 1968, there were about 200 funds

— George Soros’s Quantum Fund made hedge fund history for its role in forcing the pound out of the European exchange-rate mechanism in 1992. Hungarian-born Mr Soros admitted that he had made at least $1 billion from his $10 billion bet on the pound’s collapse.

— There are more than 2,500 funds worldwide estimated to be worth $1.1 trillion. The Cayman Islands is the most popular location with almost one in two registered there.

— When Long Term Capital Management, a fund run by two Nobel Prize-winners, imploded in 1998 after Russia defaulted on its payments to international investors, the explosion almost wrecked the world’s financial system. A group of banks had to bail out the fund and its shareholders.

— Tiger Fund Management, advised by Baroness Thatcher, was wound up in 2000 after a disastrous slump. It had been the second-biggest global hedge fund group.

— The world’s biggest hedge fund manager is Man Group

— In 2005 hedge fund trading activity accounted for up to half the daily turnover on the New York Stock Exchange and the London Stock Exchange.

— Hedge funds across the board suffered their biggest monthly declines in eight years during August amid the global financial turmoil. According to Hedge Fund Research, which tracks the $2.4 trillion industry, the funds lost a collective 1.3 per cent of their value.

— Assets managed by hedge funds have grown at an annual compound rate of 25 per cent since 1990. They are predicted to grow at about 20 per cent a year over the next four years to $3 trillion.

— The fee structures of hedge funds vary, but the annual management fee is typically 20 per cent of the profits of the fund plus 2 per cent of assets under management.

Source: Times archive/Reuters

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