Increased regulation for hedge funds on the way, says FSA’s Sants

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LONDON – Hedge funds will undergo a regulatory shake-up, according to chief executive of the UK Financial Services Authority (FSA) Hector Sants. Speaking at the Hedge 2008 conference in London, Sants underlined key areas of focus for the FSA concerning hedge fund supervision.

Sants was keen to stress the role of industry best-practice standards, particularly those issued by the Hedge Fund Standards Board (HFSB) earlier this year, and those from the Managed Funds Association and the US President’s Working Group.

FSA supervision will focus on valuations, disclosure and market integrity. Sants praised the valuation principles established by the International Organisation of Securities Commissions (Iosco) as a reference point for managers to compare models, methodologies, sources and policies.

Sants said: “The industry has also shown a willingness to confront regulatory concerns, and during these difficult times it is pleasing to see a number of industry initiatives to raise industry standards. This includes working to ensure commonality and consensus between AIMA and the HFSB in the UK, as well as with the Managed Funds Association and the President's Working Group.”

Sants also pressed the commercial benefits of implementing better industry standards: “It is not only regulators who have an interest in standards of good practice, but it is also of course in the hedge fund manager's commercial interests, as robust procedures and controls are likely to be attractive from the standpoint of the investor. Therefore, irrespective of jurisdiction, hedge fund managers should find these standards useful to identify relevant areas they need to consider,” said Sants.

To address the immediate funding concerns of the crisis, Sants highlighted the renewed importance of stress testing, while emphasising the need for risk managers to demonstrate increased vigilance against mis-marking frauds due to heightened risks of financial crime in the current market turmoil.

“These incidents may not only affect banks and broker-dealers, but also portfolio managers. Weak systems, inadequate valuation policies and inadequate independent challenge of price verification all increase the susceptibility of firms to this risk,” said Sants.

Industry pessimism over the survival of hedge funds has been fuelled by Darwinian comments made by Emmanuel Roman, co-chief executive of hedge fund GLG Partners, who estimated that up to 30% of hedge funds could disappear this year.

The speech may be downloaded by clicking the link below

http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2008/1022_hs.shtml