GLOBAL - More than 50% of UK pension funds will require hedge fund managers to comply with best practice standards within three years, KPMG has revealed.

Findings of a survey showed 80% of pension funds would favour a manager that complied with the hedge fund best practice standards outlined by the Hedge Fund Working Group (HFWG) in its report in January 2008.

KPMG pointed out in the UK, pension funds represent one of the largest potential sources of capital for the hedge fund industry, with pension fund allocations to hedge funds expected to double within the next three years from 4% to and average of 8%.

As a result, the firm suggested "the incentive for managers to sign up to the hedge fund standards is compelling", as it suggested schemes are "much more likely" to require hedge funds to sign up to the standards for reasons including a general preference for investor assurance and relative inexperience with the hedge fund industry. 

Findings of this research coincide with the publication of hedge fund best practice standards by two US private-sector committees established by the President's Working Group (PWG).

The two sets of standards - issued by the Asset Managers' committee and Investors committee - are designed to be "complementary" with each other, but are also "designed to be consistent with the work that was done in he UK to improve hedge fund oversight".

As a result, the asset managers' best practice calls on hedge fund managers to adopt "comprehensive best practices" in all areas of their business including disclosure, valuation, risk management, business operations, compliance and conflicts of interest.

Meanwhile, the best practice standards for investors - such as pension funds - includes a Fiduciary's Guide which provides recommendations on evaluating the "appropriateness of hedge funds as a component of an investment portfolio".

An Investor's Guide also provides recommendations to individuals who are responsible for "executing and administering a hedge fund programme once a hedge fund has been added to the investment portfolio".

Henry Paulson, US Treasury Secretary and chair of the PWG, said: "These best practices are coming at the height of robust discussions about the need for stronger market discipline."

"The PWG believed that markets benefit when experienced and respected participants develop best practices and new accountability standards. And these committees will continue to work on raising the bar for industry standards," he added.

Paulson also emphasised "given the global nature of the asset management industry" the two sets of best practices "are consistent with the work recently completed in the UK by the HFWG".

In its report the HFWG outlined 28 principles for best practice standards which covered the five key areas of disclosure, risk management, valuation, shareholder conduct and fund governance.

The 14 hedge fund managers which formed the HFWG  - including Man Group and RAB Capital - have now committed to "comply or explain" to the new voluntary standards - now overseen by the Hedge Fund Standards Board (HFSB) - by December 31 2008.

However, the HFWG claimed at the time "one measure of success" would be the extent to which hedge fund managers in other countries sign up to the standards, and it confirmed an "early task" would be to "evaluate the differences" between the UK and US standards as the two jurisdictions are "home to about 85% of hedge fund assets under management globally".

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

Topics