The U.K.’s Financial Services Authority has given its blessings to the so-called “alpha capture” system, which allows hedge funds to make use of trading ideas and research recommendations from investment banks, Financial News reports. The electronic system became the center of controversy, as some managers feared the hedge fund/investment bank connection could result in conflicts of interest. The largest of these alpha captures, Tops, operated by Marshall Wace, has been so successful that other hedge funds are working on coming up their own systems, which led the FSA to look into them as part of its broader investigation of the hedge fund industry. So far, so good. “The clear audit trails generated by alpha capture systems suggest the risk of this being done explicitly might be lower than through traditional communication methods,” stated the FSA. The regulator, which is expected to issue a report on the matter this week, said that in its examination it found six examples of good practice, one being that the compliance department of a bank is notified automatically when an idea is submitted. Despite its approval, the FSA did warn that the system – the outgrowth of a group of 10 investment banks that formed Trade Ideas two years ago -- could lend itself to abuse, saying, “There remains a risk that those inputting ideas may do so on the basis of inside information, masking this by giving another, seemingly plausible rationale.”
