The Wall Street Journal-20080123-European Hedge Funds Issue Disclosure Guides
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European Hedge Funds Issue Disclosure Guides
A group of Europe's largest hedge-fund managers issued voluntary best-practice standards that could prompt greater disclosure from the funds, ahead of a similar effort in the U.S.
Amid increasing political scrutiny of the hedge-fund industry, the move is an attempt to head off calls for greater regulation by providing investors and banks with more information about the risks hedge funds take and how the funds value their assets.
However, voluntary standards likely won't go far enough for some politicians, who are expected to continue calling for statutory regulation. Such calls are particularly prominent in Europe, where activist funds have helped promote or block major corporate takeover deals in recent years.
Many hedge funds aren't expected to change much in how they operate in order to adhere to the rules, but the traditionally secretive investment funds will likely need to make more information public.
The guidelines, announced yesterday and backed by industry leaders such as Marshall Wace LLP, GLG Partners LP and Man Group PLC, call for funds to disclose investment strategies and types of investments, including their use of derivatives. They also say funds should disclose more detail about -- and follow best-practice guidelines concerning -- operating practices such as their risk management and governance.
The standards include a provision for not borrowing stock solely to make use of its voting rights, for instance, and giving investors clear explanations of the total fees they collect. The report also clarifies some standards proposed in October regarding how hedge funds approach governance and valuation.
"The whole question of valuing complex instruments and hard-to-value assets is at the bottom of much of the turmoil we see around us today," said Sir Andrew Large, a former Bank of England deputy governor and chairman of the London group that compiled the standards.
Sir Andrew said he hopes the standards will reduce the appetite for public-policy makers to intervene. That said, he acknowledged regulation or legislation could still follow and said he hopes that if so, the standards would serve as "a blueprint."
Teresa La Thangue, a spokeswoman for the United Kingdom's markets regulator, the Financial Services Authority, declined to comment on how the standards might affect future regulation.
Sir Andrew says the U.S. guidelines will likely cover similar territory, with some different areas of emphasis. He said he expected the U.K. to focus more on governance than his counterparts in the U.S., for instance, while the U.S. may place more emphasis on trading execution.
The U.S. Treasury has two advisory groups examining the issue and has been in frequent contact with representatives of the U.K. group throughout their efforts, Sir Andrew said. The U.S. initiative under the President's Working Group on Financial Markets is expected to issue its proposals by the spring.
"We welcome the HFWG's report and look forward to working together to further develop strong industry practices," said Eric Mindich, who runs New York hedge fund Eton Park Capital Management and is chairman of the U.S. hedge-fund advisory group.
Tom Brown, European head of investment management and funds at audit and advisory firm KPMG LLP, said one of his reservations was that the system is self-certifying.
"It's like an honesty-box approach. It might work, but I think it's vulnerable because it only takes one dishonest representation to come to light and then the whole seal of approval becomes tarnished," said Mr. Brown, who took part in the consultation process of the report.
