LONDON Jan 26 Top executives in Britain's secretive hedge fund industry are set for a high-profile grilling on stability and short-selling at Tuesday's Treasury Select Committee but are unlikely to face much extra regulation. Managers such as media-shy activist Chris Hohn, founder of The Children's Investment Fund (TCI), and Paul Marshall, chairman of Marshall Wace, will appear before a panel of members of parliament (MPs) to defend an industry that has come in for much recent criticism from commentators and politicians alike.
Meanwhile, on Wednesday, the Committee will question auditors, whose role has been highlighted by the collapse of Lehman Brothers and the Bernard Madoff scandal and who face a potential wave of lawsuits from investors, and credit rating agencies.
Pressure has grown in recent months for tighter hedge fund regulation following controversy over short-selling of bank stocks, the alleged $50 billion fraud by U.S. financier Madoff and fears a major fund collapse could trigger a market crisis similar to that seen after the fall of Long-Term Capital Management (LTCM) in 1998.
However, the appetite for more extensive regulation appears limited, especially after the Financial Services Authority's (FSA's) temporary ban on short-selling appeared to have little positive effect.
Short-selling, where investors bet on a lower price for a security, had been blamed for adding to sharp falls last year by banks such as HBOS, now part of Lloyds Banking Group (LLOY.L).
However, many in the financial industry say bank stocks were hit by selling from long-only investors and point to greater underperformance by banks after the ban was introduced than before.
Figures from Data Explorers suggest hedge funds did not rush back to shorting banks after the ban was lifted this month, even though banks stocks fell sharply. "It would take a lot of convincing that a raft of regulation is the answer," sub-committee chairman Michael Fallon told Reuters Financial TV in a recent interview.
"We saw almost the same kind of hysteria with private equity ... People didn't understand how it worked," Fallon said. "There has been some market failure but regulation won't prevent that." In October FSA chief executive Hector Sants said he didn't think more regulation was needed in this area but that more effective regulation was needed.
The FSA regulates hedge fund managers -- but not the funds, which tend to be based in loosely-regulated offshore centres -- and has been intensifying its conversations with big hedge fund firms and had increased the number of firms it was talking to.
It has said it would reintroduce a ban on short selling without consultation if necessary.
Meanwhile, MPs will on Wednesday grill representatives of the three main rating agencies -- the U.S. Standard and Poor's and Moody's Investor Service, and smaller Fitch Ratings in Europe, owned by France's Fimalac (LBCP.PA).
The committee will also quiz auditors from KPMG and PriceWaterhouseCoopers as well as academics.
Regulators in the United States and Europe have already blamed credit rating agencies for failing to detect risks in securitised products, which triggered the credit crisis when they crashed in value.
"Rating agencies were judged and found guilty," said Christopher Hill, Swiss-based asset manager and financial adviser.
Earlier this month, the European Union's top financial regulator, Charlie McCreevy, proposed that credit rating agencies must be registered to operate in the 27-nation bloc and undergo day-to-day supervision and regular inspections.
In the United States, securities regulators adopted last month new rules to crack down on conflicts of interest at the credit rating agencies, which are mostly paid by the banks or issuers whose products they rate.
The work of auditors has been under less regulatory scrutiny, but auditors nevertheless face a tough battle to stop lawsuits from clients since accounting firm Arthur Andersen collapsed after it was indicted for its dealings with Enron.
Jonathan Hayward, director of Independent Audit strategic governance consultants, who is due to speak at the session on Wednesday, said he hoped the Treasury Committee hearing will flag the importance of reform in auditing.
"The most useful effect is to divert attention from accusations of individual (auditing) firms to understanding shortcomings of the existing system," he said.