HFWG sets hedge fund best-practice standards

Final best-practice guidelines published by industry working group

LONDON - After widespread consultation with the industry and other interested parties, the Hedge Fund Working Group (HFWG) has published its best-practice standards for hedge fund managers.

With a focus on enhanced risk management and governance, the body of voluntary standards includes recommendations for managers to adopt an independent process for valuing portfolios, guidelines for robust fund governance to handle conflicts of interest between managers and investors, and enhanced disclosure to investors.

Led by chairman Sir Andrew Large, the HFWG comprises 14 leading hedge fund managers based mainly in London. It was set up last year in response to concerns both about the growing power of hedge funds and financial stability. The standards aim to address these and other issues through increased disclosure to investors and other counterparties.

Compliance with the hedge fund standards will be voluntary and will operate on a ‘comply or explain’ basis.

A new Hedge Fund Standards Board (HFSB) is being set up to act as custodian of the standards. The trustees of the HFSB will be responsible for updating the standards and encouraging convergence with a similar initiative being taken by the President’s Working Group in the US.

Members of the HFWG will act as interim trustees of the new HFSB and Large will act as interim chairman until permanent trustees are appointed.

Christopher Fawcett, chairman of the Alternative Investment Management Association (AIMA), will become a trustee of the HFSB.

AIMA will also have a key role in developing aspects of the recommendations included in the report, acting as a channel for industry guidance and participating in consultations on future changes.

“Our final report is the result of extensive consultation within the financial industry, which has helped us to refine the standards and in some important respects make them more rigorous,” says Large. “Now it is up to investors to help take this forward. This is a voluntary, market-led initiative based on disclosure. It is the investors who can provide the market discipline to ensure these standards are widely adopted.”

Read more about hedge funds and operational risk in the February issue of OpRisk & Compliance.