European Hedge Funds Mull New Code Of Conduct

by Robert Lee, for LawAndTax-News.com, London

20 June 2007

More than a dozen of Europe's largest hedge funds have signed up to a new initiative which aims to develop a voluntary code of conduct for the industry to head off pressure from certain governments, which are calling for stricter disclosure requirements for the industry.

According to a report by the Financial Times on Tuesday, in a letter sent by the group late on Monday, 35 more European hedge funds have been invited to join the working group, which will “evaluate areas which may require strengthening and suggest solutions, which may include adherence to voluntary standards".

The initial group of 13 includes Man Group and GLG Partners - Europe's two largest hedge funds. The other founding members include: Brevan Howard; Brummer & Partners; Centaurus Capital; Cheyne Capital; CQS; Gartmore; Lansdowne Partners; London Diversified; Marshall Wace; Och-Ziff; and Rab Capital.

According to the FT, the group, which has reportedly recruited Sir Andrew Large, a former deputy governor of the Bank of England, to lead the study, will examine valuation, disclosure and risk management, and will partially mirror a similar project set up by the UK private equity industry headed by Sir David Walker, former chairman of Morgan Stanley International.

The move by the hedge funds comes after Germany's failure to wring a hedge fund code of conduct out of the G8 rich country leaders in Postdam, Germany, last month, as the governments merely renewed their commitment to 'vigilance'.

"We continued our discussion on recent developments in global financial markets, including hedge funds, which have contributed significantly to the efficiency of the financial system," said the closing communique. "Given the strong growth of the hedge fund industry and the increasing complexity of the instruments they trade, we reaffirmed the need to be vigilant."

Germany, which currently holds the rotating G8 presidency, had included a mention of a code of conduct in its preparatory draft of the communique, but cannot have been surprised at its later omission. However, a German official speaking before the meeting said that Germany would not give up on the issue.

Germany has been pushing for greater controls over hedge funds ever since the Deutsche Boerse affair in 2005, which saw investors remove Chief Executive Werner Seifert and Chairman Rolf Breuer, leading the SPD's Franz Muentefering to compare the funds to locusts.

France is another government hostile to a lightly-regulated hedge fund industry, especially since the election of French President Nicolas Sarkozy who has consistently spoken out against hedge funds: "We didn't create the euro to have capitalism without ethics or morals," he said recently, attacking “these aggressive [hedge] funds ... that buy up a company, sell it off in pieces, sack 25% of the staff in the meantime, collect 25% profit and create zero wealth.”

The United States, Japan, Britain, and Canada remain opposed to any interference in the workings of the markets. "Central banks and other regulators should resist the temptation to devise ad hoc rules for each new type of financial instrument or institution," stated Fed chairman Ben Bernanke last month.

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