Treasury-backed committees lay out hedge fund best practices

Two panels appointed by US Treasury Secretary Henry Paulson have advised hedge funds to adopt guidelines including increased disclosure and strengthened management of risk in the aftermath of the rout in credit markets.

A summary of recommendations released by the US Treasury, said that hedge funds, along with other market participants, need to better evaluate and implement strong practices to better manage their businesses and reduce risk. According to Bloomberg, the report goes on to detail a series of robust practices that its authors view as critical to reducing systemic risk. The committees were led by officials from CalPERS, the biggest U.S. pension fund, and Eton Park Capital Management LP, and were the product of a hedge-fund review by the Treasury, Federal Reserve and other regulators in 2007.

The two committees, one comprised of asset managers and the other of investors, agreed that hedge funds need to abide by new standards of disclosure. The asset managers report, which noted that there are close to 8,000 such funds managing about US$2 trillion, said the industry should improve disclosure, adopt robust' valuation and risk management procedures, and overhaul business operations and compliance practices.

Despite a judgement in early 2007 that market discipline remained the best way to protect investors and guard against risks to the financial system, Paulson appointed the outside panels to help the industry develop recommendations for fund managers and investors to ensure market participants understood risks and how to manage them.

Policy makers now acknowledge that stronger regulation of financial markets is needed in the aftermath of the $245 billion of asset writedowns and credit losses that financial companies have logged since the start of last year.

The Treasury panels urged that firms disclose hard-to-value assets and approve comprehensive investor disclosure in the same manner as public companies.

''The hedge fund industry has a critical responsibility to adopt strong business practices that reflect both its growth and the important role it plays in global financial markets,'' Eric Mindich, chief executive officer of Eton Park Capital Management in New York and chairman of the asset managers' committee, said in a statement.

“Our goal is to have those practices be accepted by both investors and hedge fund managers and perhaps most importantly to have those recommendations become common practice throughout the industry,'' Russell Read, chief investment officer of the California Public Employees' Retirement System in Sacramento, California, and chairman of the investors committee, said in a statement...more>>