FSA to probe hedge fund valuations

The UK's Financial Services Authority is to investigate hedge fund managers who it said could be overstating their assets to gain larger bonuses.

In a feedback document to a hedge fund discussion paper published in June last year, the FSA identified two areas of concern.

First, it warned that hedge fund managers could be tempted to overstate their valuations of assets under management to inflate their pay - and, given the difficulty in valuing illiquid assets, it may not be easy for administrators to challenge such overstatements.

Second, the UK financial watchdog said, some hedge fund managers may have concealed the existence of 'side letters' giving some shareholders preferential treatment.

The FSA plans to seek more information from hedge funds to improve its supervision.