Pension funds welcome hedge fund standards

LONDON (Reuters) - More than half of pension funds will require the hedge funds they invest into comply within three years with best practice standards recently proposed by a hedge fund industry group, according to a KPMG survey on Monday.

In January the Hedge Fund Working Group (HFWG) -- a group of leading hedge fund executives from firms such as Man Group EMG, Brevan Howard and Gartmore -- published a set of standards on governance and disclosure in a bid to head off critics of the $2.5 trillion (1.3 trillion pound) industry's opacity.

The measures covered controversial areas such as the valuation of complex financial assets, where the HFWG proposed that valuation should ideally be carried out by an independent third party, or if that was not possible, then someone in-house who was not the portfolio manager.

The KPMG survey, conducted last month and covering investors with around $400 billion under management, also showed eight out of 10 pension funds said they would favour a hedge fund manager who had complied with the HFWG's standards.

Valuation, followed by risk management and then disclosure were seen by survey respondents as the most important issue addressed by the standards.

"These results provide a compelling case for managers to sign up to the standards, particularly if they are expecting to attract institutional money," said Tom Brown, European head of KPMG's investment management and pension funds practice, in a note.

"Markets may go up or down, but pressure on managers for increased investor assurance and transparency will only go up."

Meanwhile, the survey also showed pension funds are expected to double their allocations to hedge funds to an average of 8 percent from 4 percent within three years.

The survey comes at a time when the hedge fund industry's returns are suffering.

Having delivered double-digit returns in recent years, the average hedge fund lost 4.4 percent in the first quarter, according to preliminary data from the BarclayHedge Fund Index, due to volatile markets, investor redemptions and prime brokers paring back leverage.