In a consultation paper published by the Hedge Fund Working Group, Large, the group's chairman, detailed proposals to increase transparency, regulation and risk management in the �180bn industry.

The introduction of the code follows a torrid summer in which the sector was rocked by several high-profile blow-ups of firms caught in the summer credit crunch.

The HFWG, set up in June to head off a threatened regulatory onslaught from European governments worried about the risks hedge funds posed to economic stability, suggested the formation of a board of trustees to set up and govern a host of new industry standards.

Among the proposals were requirements for managers to disclose holdings in companies held through complex derivative instruments, to reveal their exposure to illiquid holdings, and to set up internal controls to avoid conflicts of interest. The code is voluntary and would be operate on a "comply or explain" basis.

Large, who works at the hedge fund Marshall Wace, said the industry-led initiative "shows that the industry recognises its responsibilities as a significant force in the financial system".

London is the centre for the European industry.

According to EuroHedge, �180bn in funds are managed by firms based primarily in Mayfair in west London, representing 20% of the global hedge fund market and 80% of Europe's total assets under management.

The industry has received heat from politicians and corporate chiefs who have accused managers of being too secretive and aggressive, taking positions that may damage companies' longterm health for their shortterm gain.

The Children's Investment Fund was the driving force that led to the sale of ABN Amro, the largest-ever banking takeover. Hedge funds are also heavily involved in Northern Rock, played a crucial role in the early days of Borse Dubai's takeover of its rival, OMX, and were partly held to blame for the global credit crunch during the summer.

The FSA handed out to GLG, one of Europe's largest funds, its biggest fine for market abuse last year.

Large expressed his desire for the recommendations to be extended to other jurisdictions. "We believe the recommendations should have global relevance, " he said.

"The best-practice standards have been compiled against the background of, and attempt to articulate how hedge fund managers might operate in order to live up to, the UK FSA's 11 principles.

The principles are based on 'common sense' and therefore have appeal beyond the UK."

The Alternative Investment Management Association, the industry trade group, "welcomed this significant initiative". The publication of the paper starts a two-month consultation process, which will culminate in final findings in the new year.