Hedge funds start to police themselves

NEW YORK - Leading hedge funds are discussing two initiatives that aim to set new risk standards for the industry - one each from the US and Europe.

The US initiative, led by Kenneth Winston, global chief risk officer at Morgan Stanley Investment Management, lists 25 key principles that hedge funds will promise to uphold. General statements could include provisions to have an 'independent risk function' and 'fair and accurate pricing' of securities. Problems could arise when, for example, a risk manager's salary is tied to the profits of a firm, because managers might be tempted to take on more risk in the hope of greater profits for the firm and greater bonuses for themselves.

The second initiative comes from several large European hedge funds, including Caxton Associates' London-based division. They propose creating a standardised template that fund managers will enter important risk measurements into, such as leverage, but not position level information. The objective is to define and eliminate some of the confusion created when different firms use the same terminology - for example, leverage - but mean different things. One of the leaders of this proposal is Harvey Toor, chief risk officer at Square Investment Management, a London-based hedge fund.

Both Toor and Winston spoke on separate and unrelated topics at the annual Risk USA conference in New York.