U.K. Fund Managers Lack Systems to Manage Derivatives

Thursday October 26, 2006

U.K. fund managers don't have adequate systems in place to manage the risk of derivatives, a survey by ratings company Standard & Poor's shows. Only 2 percent of pension funds, hedge funds and other money managers surveyed by S&P have the ability to monitor derivatives before and after trades and to measure the risks they're taking, according to a report published today. Over 60 percent of fund managers said they want to put a system in place and can't find a suitable management tool to meet their needs.

``There's a real desire from investors to use more derivatives,'' said George McFerran, associate director of marketing at S&P in London. ``What the respondents are telling us is that there isn't a suitable holistic risk management system out there.

''Pension fund demand to trade derivatives is likely to grow next year when new European Union rules known as UCITS3 allow pension funds to use derivatives as a form of investment, rather than restricting their use to hedging the risk of underlying investments. UCITS, or Undertakings for Collective Investment in Transferable Securities, is a regulatory framework for pension and mutual funds in Europe.

Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates.

U.K. money managers oversee about 3.5 trillion pounds ($6.5 trillion), according to International Financial Services London, a trade group. Pension funds and insurance companies are responsible for about two-thirds of those assets. S&P surveyed 169 asset managers, 76 hedge funds and 70 private client and private equity funds.

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