Britain's hedge funds plan to draw up the first voluntary code of conduct of the industry to increase transparency and improve risk controls, hoping to fending off calls for increased regulation, a senior hedge fund official told CNBC Europe.
Fourteen of the London's biggest hedge funds have come together to draw up a rule book that will oblige firms to either comply or explain their non-compliance.
"The (hedge fund) industry has been very conscious of the issues that have been raised about the hedge fund industry by politicians, by regulators and others within the industry," Sir Andrew Large, chairman of The Hedge Fund Working Group, told Geoff Cutmore on "Squawk Box Europe".
"And they felt that this was the right time to come forward with a code of conduct that explains, really, how the industry works, what the best practice within the industry really is," he added.
The three key standards of the code will be disclosure of complex holdings, clearer risk management and set policies for conflict resolution, in order to protect investors.
Under the code of conduct, the methods to assess hard-to-value securities will be disclosed, while risk management plans will include ways to address the risk of running out of cash, the Financial Times said.
The plans, out for consultation until mid-December, are likely to be examined in the US, where investor and hedge fund committees have been set up to draw up guidelines.
European officials have called for regulation that would force hedge funds and private equity firms to be more transparent. Voluntary code of conducts may not work as effectively, some analysts have argued, because there is no way to make sure they are enforced.
But Andrew Large, who is also chairman of listed hedge fund MW Tops, said the hedge fund market would put pressure on industry players to comply, as well as their investors.
"First of all, there will be peer group pressure, these are serious people, and they are not going to sign up to a code of conduct and set of behaviors, unless they intend to take them seriously," Large said.