At last, hedge funds admit they must solve image problem

If the plummeting commodity, credit and share markets of recent months had not blown a hole in the performance and collective inflated ego of the hedge fund industry then the fact that some of its most feted names including Arki Busson, Nicola Horlick and RAB Capital's Philip Richards had invested and lost money in Bernie Madoff's bare-faced $50 billion Ponzi scheme, has undoubtedly grounded the whole industry.

Hedgies, just like everybody else, we found, can lose money. And then a curious thing. In the immediate aftermath of the Madoff scandal, there was a declaration by something calling itself the Hedge Fund Standards Board. Peopled by London's hedgerati - Man Group's Peter Clarke, Michael Hintze of CQS, Paul Marshall of Marshall Wace, Manny Roman of GLG and George Robinson of Sloane Robinson - the Hedge Fund Standards Board may sound something like the Mafia being self-policed by the Corleone family.

But the words of its chairman, former Goldman Sachs executive Antonio Borges, were stark: "The Madoff scandal highlights just how important it is to have independence of process in relation to administration of the fund and the valuation process. It also highlights the need for robust governance practices and oversight via independent boards which will challenge management procedures and behaviour."

It was time, Borges was almost saying, for the hedge fund industry to clean itself up. With Bernie behind bars, one of his victims - no less than London's biggest hedge fund manager, Man Group - has decided that if its franchise is to retain any credibility it has to act. The simple facts about Man in recent months are these: its profits have halved, $17 billion of funds have been withdrawn by investors - institutions and the world's richest families - and oh yes, one of its fund of hedge fund managers in its RMF arm had invested in and lost a cool $360 million in Madoff's fantasy funds.

At the time, FTSE 100-quoted Man Group said it was a victim of "a systematic and comprehensive fraud", but one which had "evaded a range of [Man Group] structural controls".

The fruits of that foul-up are now being addressed by Man. In a shake-up of its operations this week it is promising "increased transparency, governance and risk management". It is promising "a structure which separates investment management and oversight" and "enshrines an independent risk management function at the same level as investment management". And it promises a new "depth of due diligence" on behalf of its clients.

"As markets have changed, so have investor requirements for hedge fund investing," says Man chief executive Peter Clarke. "Performance remains an absolute requirement but transparency, governance and risk management are now at the top of investors' agendas.

"They are looking for providers with the scale, expertise and systems to deliver the enhanced transparency, institutional quality governance and stronger controls over invested capital they require."

Fine words but what do they mean? They mean that Man - and the rest of the industry - have not been at what is now considered to be best practice, that profits meant more than managing risk.

They mean that performance is not necessarily the priority: that funds that appear to be run with the integrity of visible oversight will be, reckons Man, more important to investors than those racier managers simply promising guaranteed returns of many percentage points over Libor.

And for the Man investor, a revolution. Man is effectively promising that it will now look a lot more like a traditional long-only investment fund; that investors will invest via managed accounts where they can see what they are investing in, will have some say over "mandate creep" when a manager is investing in what he should not, and have the capability to exit if they so wish on much better terms than hitherto.

"This is the way the industry is going," said a spokesman.

Is this the end of secrecy, arrogance and recklessness in the industry? "Smaller single-manager hedge funds have been accused of this," he said.

"What we would say is that the levels of regulation, compliance and oversight that are coming will be higher and that some may not have the scale to be able to cope."

A hedge fund industry that wants to be loved? The end of the spivvier, albeit plummy-toned, end of the industry? The ravens must be preparing to leave the Tower of London.