Hedge fund clarity is key
Before the credit crunch, hedge fund performance was a matter for managers and their investors alone.
Come the crisis, however, and reams of documents detailing fund returns were printed – usually to managers’ chagrin – in trade journals and on websites.
John Paulson, Louis Bacon, Paul Tudor-Jones and Christopher Hohn were among those whose funds’ performance was posted online in leaked proprietary data lists of private banks.
A senior figure at one London manager says keeping a low profile is important: “If one of your funds was up 50% and another down 5%, even though 5% down was relatively good, the media was still all over the second fund. Were you careful with publishing data? Of course.”
Some funds de-listed from Ireland’s stock exchange to avoid having to broadcast material changes to products’ terms, such as gating. But as funds recovered more returns, more data than ever before is being made voluntarily available, which some managers regard as positive.
Andrew Dodd, member of the asset allocation committee and board of AllBlue, Bluecrest Capital Management’s fund of internal hedge funds, says: “If managers are providing more frequent written information, or more transparent written data into the market, that has to be a good thing for the industry. It is also a testament to what [Bluecrest’s internal fund of funds] AllBlue does.
“The institutional and retail worlds remain under-allocated to hedge funds versus where they will ultimately be. One reason is that it is a learning curve for investors. The more the industry can do to provide reassurance and help with that learning, the better it will be for the industry as a whole.”
AllBlue publishes to investors returns from its constituent funds, and has weekly NAV estimates for underlying funds. Listed hedge funds must disseminate information under listing rules so the market can make ‘informed choices’ about investing in and pricing of funds.
Man Group, a long-time champion of transparency, has begun publishing performance of unlisted portfolios of GLG in financial statements, Och-Ziff has published its funds since 2007, and Fortress Investment Group started in January.
Maarten Nederlof, managing director of investor PAAMCO (pictured), says: “It is really up to managers whether or not they want to share information above and beyond what the FSA or SEC require. But is PAAMCO in favour of greater transparency from the industry in general? Absolutely, yes.”
Simon Thomas, partner at lawyer Akin Gump, says less secrecy is the prevailing trend in the industry, but managers should not shout numbers from the rooftops to avoid unwanted regulatory attention.
“There are still tensions between the private fund world [which by definition is ‘private’] and requirements for transparency. In most jurisdictions, you are not allowed to promote a private fund widely, or hold it out to the public,” he says.
“In addition, in the US, most managers have not been registered with the SEC so have not been able to publicly hold themselves out as investment managers, although recent regulatory reform has resulted in many managers now being required to register.”
Thomas adds that there has been a softening in the UK as to what constitutes ‘financial promotion’ – what is allowable between authorised managers and eligible investors – and performance can even be gleaned from newspapers.
He says: “The view in the UK is that you can provide information about a fund, as long as you are not giving people access to invest in the product.”
As more regulated hedge funds are launched, more performance information will become available. In many cases where onshore funds are structured to mirror performance of an offshore parallel fund, the hedge fund’s returns will be implicitly unveiled, too.
Thomas notes: “Over time, transparency has definitely improved, but you have to remember it is only as good as what happens on the other side: that is, what investors can do with it. Information by itself does not make a fund any safer an investment.”