UK to probe for hedge fund market abuse

By Gerard Wynn

LONDON (Reuters) - Britain's financial watchdog is poised to investigate to determine whether the hedge fund industry has been guilty of market abuses, it told Reuters on Tuesday.

The investigation will start later this year, Andrew Shrimpton, the head of the Financial Services Authority's (FSA) new hedge fund supervisory unit, told a Reuters Hedge Funds and Private Equity Summit in London.

Market abuse will form a third plank of FSA hedge fund monitoring, joining an investigation announced last week into whether some managers inflate asset valuations, and whether others give selected investors preferential treatment through so-called "side letters".

"The third priority after valuations and side letters will be something in the market conduct, market abuse area," said Shrimpton.

"We're just discussing it with our markets people how we scope that out, when it will take place, but that be will be our third priority. We'll try and do it this year."

The FSA has become more alive to market abuse issues, saying last month it had uncovered signs of insider dealing at almost a third of British M&A deals, with possible culprits including traders at hedge funds and investment banks.

It said it had uncovered unexpected share price moves ahead of official announcements at around 29 percent of big, UK takeover bids in 2000 and 2004, a sign of suspect "informed trading".

The watchdog's growing interest in the hedge fund industry coincides with what it describes as hedge funds' increasingly important role in financial markets, and the wider disruption that a fund collapse would therefore pose.  Continued...