FSA offers market abuse advice after “disappointing” hedge fund review

In a number of visits both to small and globally active hedge funds, the UK regulator found a wide variation in the quality of systems and controls in place to combat market abuse. In its October newsletter, the FSA noted: “While some hedge fund managers had a high level of awareness and appropriate controls in place, others demonstrated a complacent attitude to the risks. We are disappointed by some of what we saw.”

The regulator identified a number of areas where it felt controls and internal processes needed to be strengthened, and set out its “view of the kind of measures hedge fund managers should be taking”.

“We were particularly disappointed at the level and standard of training at some of the hedge funds visited. While there are pockets of high-quality training, we found that sometimes training was nonexistent or of poor quality. It is essential that staff operating within hedge funds receive appropriate and regular training on market abuse,” the FSA said.

Many of the firms visited did not have sufficiently stringent systems and controls to detect and restrict market abuse by staff, had implemented little in the way of internal or external monitoring of market abuse controls, and had largely deferred regulatory responsibility to the compliance team, with little or no involvement from senior management, the regulator said.

The recommendations are the latest in a series of initiatives under discussion to inject more standardised controls and transparency into the hedge fund market. In July, a group of 14 hedge fund managers established a hedge funds working group to review best practices in the industry, with the possibility of eventually issuing voluntary standards for hedge funds.

That announcement followed German finance minister Peer Steinbrück’s proposal for a voluntary global code of conduct for hedge funds – a suggestion that met with a tepid response when presented to fellow European finance ministers in May.

In the US, similar overtures toward regulation have also tapered off - in February, a report from the President’s Working Group on Financial Markets concluded existing regulation of key hedge fund counterparties is robust enough to forestall the need for further supervision, and in April the Senate rejected legislation to reintroduce the requirement for hedge funds to register with the Securities and Exchange Commission.

See also: Large heads hedge fund working group

US senate rejects hedge fund rules

PWG recommends no change to hedge fund rules