Hedge Fund Intelligence New standards in Investor Transparency

NEW STANDARDS IN INVESTOR TRANSPARENCY due diligence, it recognises that there are limits to what is practical in terms of transparency. “Our minimum required level is not 100% transparency,” he says. “But we do demand that all our managers have third-party administrators and must allow us to obtain verification of the breakdown of assets from the administrator. Taking the example of a long/short equity strategy, we would want confirmation from the administrator of the liquidity of each of the positions within the portfolio.” Managers less prepared to offer position-level information will generally provide information via third-party aggregators such as the Ris kMetrics HedgePlatform. Some would say that provides the best of both worlds for funds and investors alike. According to RiskMetrics, “because position-detail is not revealed, hedge funds maintain their investment edge while investors are able to perform robust due diligence, monitoring, portfolio construction and risk management”. THE LIMITATIONS ON BEING OPEN Even among managers that are comfortable with full reporting, there are some very clear limitations to the amount of transparency that funds can offer, for a number of reasons. The most obvious of these is in cases where the fund’s strategy – its raison d’être – depends on a degree of confidentiality. “We would have sympathy with some funds not wanting to reveal all their positions in real time,” says Fawcett at Permal. “In the case of activists, for example, managers may be building up a strategic stake in a company which is market-sensitive information. So we would understand why that would make managers reluctant to provide information.” Another potential limitation to full-level transparency is in the area of hard-tovalue derivatives and other complex new instruments, although market participants say that notable progress has been made on the provision of more granular information in this area. “Technology has come a very long way over the last decade,” says Northern Trust’s Cherecwich. “It was very difficult to guarantee transparency 10 years ago on the derivatives side, for example, because everything was bilateral and paper-based. The level of automation we now have means that even in the complex derivatives space, we can provide transparent, real-time reporting.” Another limitation on transparency is in the case of smaller or start-up funds © HedgeFund Intelligence June 2014 Special Report 13

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