FSA to hold probe into possible market abuse by hedge funds

FSA to hold probe into possible market abuse by hedge funds

	Published : Wed, 05 Apr 2006 14:25 By : Richard Owen Print this Story

LONDON: The Financial Services Authority is to undertake a probe into the operations of the hedge fund industry to find out whether there are any market abuses. The investigation is expected to begin this year, head of FSA's new hedge fund supervisory unit Andrew Shrimpton told the Reuters Hedge Funds and Private Equity Summit.

The FSA had announced last week an investigation into whether some hedge fund managers inflate asset valuations and whether some give selected investors preferential treatment. The market abuse will be the third issue for the investigators, Shrimpton said. He said the FSA is discussing it with market people and how it can devise a method of investigations. However, this will be a third priority for the agency, he said.

The FSA acknowledges the important role of hedge funds in the financial markets and it is therefore concerned about the ramifications of a fund collapse.

It is estimated that some 8,000 to 10,000 hedge funds were managing between $1 trillion and $1.5 trillion in 2005, which was almost double the figure in 2000, though it is comparatively a small figure compared to the total global assets of more than $90 trillion.

The summit saw hedge fund managers deliberate on the prospects of the industry and the likely impact of the changed perceptions on investment.

Many of the fund managers believe affluent investors can now gain access to profitable private equity funds, as banks are setting up funds opening up an industry once a privilege of the world's very rich.

Chief investment officer of private equity firm Apax Partners Worldwide LLP Adrian Beecroft told the summit that private banks could provide further access to participate in his firm for wealthy clients who are not rich enough to be called millionaires. "There is a move among some private banks to produce products that are syndicated groups of investments either in one private equity fund or across a number of private equity funds," he said.

Nils Tuchschmid, head of multi-manager portfolios at Credit Suisse, said hedge funds are beginning to invest in property as part of a move into new assets. He said they favour property for the security it can offer. "If anything goes wrong, they can get the property, no question. But there is an issue of whether they are becoming a real estate boutique ... There aren't so many real estate hedge fund managers in the industry, but it will come," he said.

Citigroup's European head of equity finance Nicholas Roe sounded a word of caution at the summit. He said hedge funds are finding it more difficult to recruit people as pay structures of investment banks have improved. Hedge funds are no longer seen as a get rich quick alternative, he said. In the past years, hedge funds had been a preferred place of work for several professionals.

Roe said people do not necessarily feel that running a hedge fund or moving to a hedge fund these days is a get rich quick scenario. If anything, working for an investment bank offers some stability.