Financial Services Authority of Britain controls hedge funds

Britain's financial industry watchdog assessed the systems of hedge funds in order to foresee market abuses after finding current levels of control disappointing.

Photo: Financial Services Authority of Britain controls hedge funds

The Financial Services Authority said in a report published Monday that it had visited a range of hedge fund firms and banks to gauge whether increasing activity by hedge funds had led to a correlated rise in the potential for insider dealing.

"Some hedge fund managers had a high level of awareness and appropriate controls in place, whilst others were less aware, had fewer controls and demonstrated a complacent attitude to the risks," it said in a monthly newsletter from its markets division. "We are disappointed by some of what we saw."

The FSA said it would follow up with the firms it had visited, before extending its reach to a wider cross-section of hedge fund managers over coming months "to formally assess their market abuse systems and controls."

The FSA's investigation comes as pressure mounts on lawmakers in Europe and the United States to tighten regulation of the increasingly powerful hedge fund industry, estimated to be worth around US$2.5 trillion (1.74 trillion EUR).

Hedge funds and private equity firms have been blamed in some quarters, amid a lack of transparency about their activities, for exacerbating the global liquidity crisis that has caused turmoil on financial markets and led to lower economic growth forecasts.

The U.S. Securities and Exchange Commission also recently increased scrutiny of the potential for insider trading at hedge funds. The U.S. agency sent hedge funds a detailed list of questions in August intended to ferret out employees and clients who would be in a position to acquire and pass along inside corporate information to managers of the investment vehicles.

The FSA said that while it supported moves made by hedge funds to limit receipt of inside information to one named individual and to develop lists of restricted securities, it had wider concerns about the number of leaks about potentially price-sensitive events.

"We will take action in situations where we identify the deliberate leakage of information or the dissemination of rumors," it said.

It added that the level of training on market abuses was sometimes "nonexistent, low and/or of poor quality."