New watchdog will monitor hedge funds

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A new hedge fund industry watchdog will be established to increase transparency within the controversial sector as it looks to deflect criticism of its complicated and often secretive practices.

The move follows a similar initiative taken by the private equity sector to increase visibility of the industry over the past year following criticism from trade unions and politicians about the effect such financial organisations have on the wider economy. The latest set of guidelines, which have been sharpened up since the interim proposals were published in October, aim to establish voluntary standards for hedge fund managers, including independent valuations of portfolios and improved disclosure.

Sir Andrew Large, chairman of the Hedge Fund Working Group, said although the new body would have no power to intervene if hedge fund managers failed to comply with new voluntary guidelines, the new body – dubbed the Hedge Fund Standards Board – would promote best practices. The new body will be financed by the industry and will act as a "custodian of the standards" while also working toward convergence of best practices with the US.

Under the new guidelines, fund managers would need to comply with the standards or explain why they have failed to do so.

Sir Andrew, a former deputy governor of the Bank of England, said: "Now it is up to investors to help take this forward. This is a voluntary, market-led initiative based on disclosure. It is the investors who can provide the market discipline to ensure these standards are widely adopted."

How to value complex financial instruments has become a major talking point in the financial community and the Hedge Fund Working Group hopes the new guidelines will stimulate debate in the industry. Sir Andrew said that investors needed more certainty on the amount of risk when investing, with confidence low in the wake of the recent market turmoil.