Since the financial crisis, hedge fund investors have demanded more transparency, and managers have worked to meet those demands without betraying their proprietary strategies to competitors.
However, a recent study by Northern Trust Hedge Fund Services found a huge gap in investors’ and managers’ perceptions of whether industry changes have been sufficient.
The study found that 55% of hedge fund investors wanted more or substantially more transparency from their investments, while 98% of managers thought all or substantially all of their investors were satisfied with the level of transparency they were receiving.
According to the study, two factors accounted for this gap. Managers sought to protect their proprietary strategies, while investors found that traditional levels of transparency, such as month-end sector transparency, did not help them understand exposures and hidden risks in their portfolios.
Moreover, investors who adopted managed accounts that gave them total transparency were often unable to take advantage of the information as a means of holistic risk management.
Risk aggregators that would provide trade-level information “are realistic only for the largest investors,” the report said.
Northern Trust, with Asset International, conducted an online survey in September of 303 international investors and managers of 118 hedge funds, 192 investors and 70 managers in North America.
How to Achieve Consensus
The report said closing the transparency gap would require the development of new ideas for data management and new market practices, changes that are within reach because of technology advances and the maturation of the hedge fund industry.