FSA Begins Constant Scrutiny Of Top 25 Hedge Funds

by Robin Pilgrim, LawAndTax-News.com, London

11 November 2005

Twenty-five of the UK's leading hedge funds are now facing increased scrutiny from the country's Financial Services Authority, it emerged this week.

As part of the financial regulator's attempts to gain a better understanding of the industry, it announced earlier this year that it would begin to closely monitor the funds with the most potential to disrupt markets.

Although the funds in question have not been named, observers have suggested that they are likely to include those that are highly leveraged and prone to engage in rapid trading activity in various markets.

Responding last month to the FSA's consultation on this matter, entitled 'Hedge funds: A discussion of risk and regulatory engagement,' the Alternative Investment Management Association (AIMA) disputed the need for increased hedge fund scrutiny.

The AIMA stated that it welcomed the FSA’s several acknowledgements of the benefits that hedge funds bring to financial markets and also noted recent comments made by the FSA’s executive, referring to appreciation of hedge funds’ increasing importance and contribution to dynamic marketplaces and to the UK as the centre of hedge fund management in Europe.

However, the association revealed that it did not share the FSA’s perception of undue risk likely to be caused to markets by hedge funds, either singly or in multiples; in AIMA’s view, no evidence had been offered to suggest that hedge fund managers are likely to cause any more disruption to the market than other players.

"Throughout the first 10 months of 2005, and contrary to media rumours, there has been no serious market disruption," AIMA's response stated.

"As in most years, a number of hedge funds may have suffered reversals in market performance and there has been a steady attrition of unsuccessful funds. However, in a free market, this is not a sign of ill-health in the market as a whole," it added.

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