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The Importance of Being Earnest: Institutional Investors and Hedge Fund Transparency

by Graeme Terry

  • 13 Jun 2011
  • HF

Preqin’s latest study has highlighted the growing importance of transparency for institutional investors in hedge funds and how managers have been quick to change their reporting procedures as a result. Of the 50 prominent institutions that were interviewed for the study, 78% revealed that they now look more closely at how the hedge funds they invest in operate than they did in the past. This is further highlighted by the 84% of investors that stated they would now reject a fund if it did not meet their transparency demands. As a result, hedge fund managers have had to improve their methods of communication with investors in order to continue attracting investment as well as retaining their existing capital.

Following the market crisis in 2008 and the Madoff scandal, confidence in hedge funds waned. However, there has been a marked improvement in the level of transparency of hedge funds as managers recognise the importance of listening to investor demands in this new era of heightened investor caution and scrutiny.  96% of investors surveyed believe there has been an improvement in transparency over the last 12 months which demonstrates that managers are listening to their investors and interests are becoming aligned between these institutions and their funds.  Just 10% of those surveyed felt that the level of transparency is insufficient, whereas last year more than half of all investors wanted funds to work harder at the level of disclosure they offered their investors.

The most common transparency requirement of investors is a portfolio breakdown by sector/industry with two thirds of investors requiring this. Other requirements high on the list include profit and loss attribution, a breakdown by geographic region and the names of the top five holdings in the fund. 54% of investors require full position transparency with 23% expecting real time access to portfolio positions. The majority of investors expect to receive a monthly performance update with 71% of investors preferring this option. In terms of the method of communication, 58% expect a monthly newsletter via e-mail while 37% prefer a monthly call from the manager.

It is now clear that transparency is a major issue in terms of enabling confidence amongst hedge fund investors. As a result managers are starting to adapt to these demands and it is expected that the situation will continue to improve over the coming years, as new legislation is approved, fund reporting systems improve and institutional capital becomes ever more vital to the success of a hedge fund. If managers do not take transparency demands into account then they risk missing out on potential investment with investors clearly demonstrating that they will take their money elsewhere should their requests for transparency not be met.

 

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