Most funds lack internal controls and capability to handle derivatives, says PwC

Most fund management companies do not have adequate internal controls and are unable to handle derivatives properly, according to a survey by UK accountants PricewaterhouseCoopers (PwC).

PwC spoke to 81 investment management companies from around the world, with total assets under management of $9 trillion. Asked about their moves to comply with new risk control legislation such as Sarbanes-Oxley, 89% admitted that they had not carried out a risk assessment, and 91% said no appropriate controls were in place. Of those, roughly half said they had no plans to do so.

The survey also included round tables in London and New York, which highlighted investment managers' concerns over the use of complex financial products.

"Participants at the London roundtable expressed concern that the current move towards the use of derivatives in investment management is not matched by risk management expertise," wrote the survey's author, Simon Jeffreys, who leads PwC's investment management industry group. "This was seen as a key issue, with Ucits III products, hedge funds and liability-driven investing all encouraging derivatives use."

Managers also expected increased use of alternative asset classes, with 49% saying they planned to move further into hedge funds in the next three years. Private equity funds (67%) and property funds (54%) are also set to become more popular. Few investors had plans to reduce their exposure to any sector, the survey found.

Jeffreys added: "Revenue expansion rather than cost cutting is the highest priority. As the industry looks ahead over the next few years, ageing populations, increased use of derivatives, the drive for alpha, changing distribution and more regulation are some of the factors that will transform its shape."