It will potentially mean a narrower range of products being offered, and retail investors will lose.”Mr Crook added that a number of group actions had already been publicly threatened, including the potential case for compensation by shareholders in Railtrack and Equitable Life policy-holders. Interest in organising group actions has been prompted by changes in legislation giving the courts powers to make group litigation orders in the UK and to direct how such claims are brought.Mr Crook said: “Although the powers exist to allow group actions, it’s unlikely the courts will jump at the opportunity to follow the US, where multimillion-dollar class actions have become commonplace in the financial services industry.”The courts will be concerned to avoid situations where people claim compensation unreasonably and will bear in mind the potential knock-on effect which could drive costs up in the sector and ultimately make it more expensive for people to invest. But in appropriate cases the courts will not shy from awarding compensation.”And the FSA will not want the courts to become arbiters of disputes between the industry and consumers. It has emphasised to investors that they cannot claim compensation if their losses are due simply to falling markets. At the same time, it expects institutions to investigate complaints promptly and fairly and to take remedial steps themselves where appropriate.”But in complex situations involving large numbers of complaints or where the amounts of compensation being claimed are substantial, it may be more appropriate for the matter to be dealt with by the courts in a group action. If actions are brought successfully we could see a rapid growth in claims of this nature.”. Thames River Capital, though probably not a name you will have come across, is among the most successful new specialist fund management boutiques to have set up shop in London in recent years.

Its annual presentation 10 days ago provided interesting insights into market conditions and the way hedge funds, the fashion of the moment, are progressing. Moneynetsavingssearch Thames River Capital, though probably not a name you will have come across, is among the most successful new specialist fund management boutiques to have set up shop in London in recent years. They include conventional long-only funds which do not go short (unit trusts), long-short hedge funds and a multi-manager fund of funds. Such has been its popularity that several of its funds are either closed to new investors, or shortly will be.It is no accident that Thames River Capital operates in very specialised markets, since this is where highly incentivised hedge fund managers can most reasonably hope to make the most disproportionate impact.

The three areas where its funds invest are European equities (the most conventional asset class it targets), emerging market bonds and Eastern Europe (which includes Russia as well as many of the former Soviet satellite states).What makes these last two areas in particular so attractive to hedge funds? One reason is that emerging market bonds and Eastern European equities are high-risk asset classes This means the potential returns are high. Both markets are extremely volatile, which guarantees there will be repeated trading opportunities for those who know what they are doing to demonstrate their prowess.A second, related factor is that both emerging market bonds and Eastern European equities are broadly inefficient markets, that is, they are not sufficiently well-researched and understood for prices to be as accurate or reliable as they would be in London or New York. It is logical to expect that smart and experienced analysts will be able to find more profitable opportunities in obscure or frightening-sounding backwaters (such as Serbian sovereign debt, one of the firm’s bigger recent positions) than they could in a mature market such as London.A further key attraction of emerging market bonds and Eastern European equities is that the returns they do produce are not only volatile, but are also poorly correlated with alternative asset classes (such as other bonds in the first case, and other equity markets in the second). As standard finance theory demonstrates, diversifying a portfolio across poorly correlated markets or asset classes enables investors to reduce their overall risk for any given level of return.In the case of Eastern Europe, there is the added factor that returns from different countries are not well correlated either: what happens in the Athens stock market has very little direct relationship with what happens in Moscow, for example.Having shrewdly poached established teams of specialists from other firms to launch its funds (its highly ranked Eastern European team came from Baring Asset Management) there is no doubt Thames River Capital has hit on a successful business formula Its performance record to date has been good. The Eastern European funds have done particularly well in absolute and relative terms over the past year, despite the underlying markets having on average done little more than move sideways.Two interesting reasons for that, says the fund manager, Martin Taylor, can be traced to the impact the influx of new money into hedge funds over the past year has had. Scores of young hopefuls, it seems, are being sent to cut their teeth on the Eastern European markets.

The average experience of those managing money in the region is about three years. Those who are any good are quickly promoted by their firms to cover more mainstream markets, leaving those behind, in Mr Taylor’s words, to “repeat the same mistakes over and over again”.At the same time, the pressure on young and inexperienced analysts to support their firms’ corporate finance efforts (the conflict of interest problem that lies at the heart of the dispute between Merrill Lynch and Eliot Spitzer, the New York attorney general) is apparently even greater in Eastern European markets. The inaccurate earnings forecasts and false markets that result are food and drink to the old hands who have been following the region for years.Emerging market bonds are not an area I confess to having followed closely, but they have always struck me as a potentially interesting market, not just for the exceptionally high returns you can achieve (16 per cent per annum compound over the past 10 years) as the price for the risk you are taking on. It is more because they are so evidently a market where fear and greed will naturally tend to be accentuated, which must, in principle, create big opportunities for savvy, contrarian investors.Life is too short and too complicated for me to form a decisive opinion on the relative pricing and risk of Serbian sovereign debt, but for those who are paid handsomely to do just that, it is reasonable to expect that the best of them will be able to produce equally handsome risk-adjusted returns.Investing prudently and knowledgeably in such exotica is precisely what hedge funds should be doing, in my view. The only problem for investors is to make sure they can find the handful of exceptional talent before the flood of mediocre or worse “me too” imitators tarnishes the whole concept.Which is what, I fear, is bound to happen to hedge funds as a class in the not-too-distant future.davisbiz aol . You may not want to go to the neighbours’ party, but it’s rotten if you’re not invited. And that sums up my feelings towards the present new issue party in the City.