FSA Probe Heralds Tougher Hedge Fund Regulation In UK

by Phillip Morton, Investors Offshore.com

11 May 2005

Hedge fund regulation in the United Kingdom could be due a wide-ranging shake-up after the Financial Services Authority launched an investigation into the workings of hedge funds which regulators fear could undermine financial stability in the world's second largest hedge fund centre.

A report in the UK newspaper The Independent claims that the FSA is interested in examining certain "cutting edge" trading practices used by hedge funds. According to regulators, these practices pose a threat to the stability of the financial system and the FSA has felt compelled to intervene following some apparent "near misses".

In an attempt to gain an insight into the trading practices of hedge funds, FSA officials have visited a number of firms in recent weeks to observe traders and examine data. It is thought that regulators are particularly concerned over the impact of "aggressive" trading strategies, such as the selling short of company shares.

This is expected to lead to a new report on how hedge fund regulation can be improved and tightened, which FSA chief executive John Tiner is expected to put to consultation in the coming weeks.

London is by far the largest hedge fund centre in Europe, and a recent report by International Financial Services London (IFSL) calculated that the city controls one-fifth of global hedge fund assets, which are now said to top $1 trillion.

Of the 900 hedge funds located in Europe, two-thirds are said to be located in London, and IFSL concluded that the city's access to clients, its favourable regulations and history as a financial centre has made it second only to New York in the hedge fund stakes.

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