Small European hedge funds have been unwilling to sign up to the Hedge Fund Standards Board's (HFSB) voluntary industry code because they are focused on survival, board trustee Christopher Fawcett said. The HFSB has come under fire in the United Kingdom for not having enough signatories to its code.
The HFSB said in December that only 33 firms had signed up, of the between 400 and 450 firms in the UK. In terms of assets, those signatories represent about one-half the industry in Europe. "Clearly there are a number of smaller hedge funds which probably won't be around in twelve months time, and, therefore, their main focus will be survival and reducing costs," Fawcett said in an interview late last week.
Fawcett, who is also chief executive of hedge-fund firm Fauchier Partners, told Reuters in an interview that many firms were running their businesses along lines similar to the HFSB's best practice standards on disclosure and governance in preparation for signing up to the code. "People should be focusing on the percentage of assets signed up rather than the number of managers," Fawcett said.
Many hedge funds have been battling falling fees and client redemptions after the industry posted a record poor performance last year. At the same time, pressure has been mounting for there to be greater regulation of hedge funds. European Central Bank President Jean-Claude Trichet said on Monday that the credit crisis was a "loud and clear call" to extend regulation to hedge funds and all other important market players.
The HFSB was formed following a report in January 2008 from the Hedge Fund Working Group, an industry initiative designed to respond to concerns over systemic risks posed by the industry. The body, whose code was designed to stave off further governmental regulation of the freewheeling industry in Europe, came under fire last month in a UK Treasury Select Committee meeting for failing to attract more signatories.
Treasury Select Committee member George Mudie said last month that the take-up was "a dangerous snub to the public and to the authorities from your industry." "You've attracted 20 fresh members in a year. If I was a trade union officer on recruitment I'd be sacked," Mudie said. Committee Chairman John McFall said the HFSB was "a weak industry body and ... there's quite a long way to go there".
HFSB's Fawcett said the hedge fund industry was set to become simpler in structure in the wake of the alleged $50 billion fraud by US financier Bernard Madoff. Investors in the alleged Ponzi scheme were exposed to Madoff through often-complex routes, including via a feeder fund that was sometimes selected by a third party, or a structured product mirroring the fund's performance. Many hedge funds that were previously closed to new clients have since opened their doors as investors have made net withdrawals across the industry.