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How much information should be provided to investors about the fund they have invested in? The answer to this question has evolved over time. In the past, limited information was provided on the theory that the manager always knew best and the trading strategy should remain as shrouded as possible in order to achieve performance. Passive investors willing to simply receive a monthly statement showing their current account balance was the norm. In recent years however, along with the advent of more institutional and sophisticated investors, has come a demand for greater transparency. But do the managers have the ability to meet this demand?
Providing greater transparency to investors will come at a cost. It requires infrastructure to develop and report more data and analytics, and hedge funds will typically have to add to staff or outsource in order to meet that demand. This is a particular burden on smaller funds, who often simply do not have the staff to manage the process even if it is outsourced.
A recent survey by Northern Trust Hedge Fund Services on this issue is illuminating. In a global hedge fund industry survey of more than 100 hedge fund managers and 300 institutional investors, about half of the investors indicated that they need more transparency. However, only 45% of those in the US/Canada, and a lesser percentage in APAC /EMEA, were willing to pay a 1-3% basis point increase in management fees in exchange for more transparency.
An additional concern for managers is the legal “selective disclosure” issue. Essentially, the concern is that one investor should not be favored over others in the receipt of material information. For example, an expected negative event transmitted early to one investor might allow that investor to redeem ahead of others, leaving the remaining investors “holding the bag”. From a legal point of view therefore, managers need to manage what information is going to whom, and understand when a selective disclosure issue might arise. This adds yet another layer of complexity — and management cost — to the provision of greater transparency.
We would note that another finding of the Northern Trust survey was that 98% of surveyed managers felt that their investors were entirely or mostly satisfied with the transparency they receive. The disconnect there between what the managers perceive and the investors desire is therefore likely to lead to the push-and-pull on this issue continuing for the foreseeable future.
Read more articles about the hedge fund industry and related legal issues at Hedge Rows, a blog by Judith Gross.
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