Hedge Fund Transparency: Where Do We Stand?

Abstract

Unlike mutual funds, hedge funds are reluctant to provide detailed information on their investment portfolios. Since hedge funds may use niche investment strategies in narrow market segments, fund managers portend that thorough disclosure of their portfolio holdings—which are important to assessing future returns—would crowd out their trades, thus decreasing opportunities to generate outsized returns. However, incomplete disclosure can have some undesirable side effects. It might encourage hedge fund managers to take positions that are riskier than provided for by the manager’s mandate. Investors even risk fraudulent behavior, since the action of hedge fund management may be detected only when a fund has failed.This article presents the results of a comprehensive survey of hedge fund managers and investors on current hedge fund reporting practices. The authors find that the quality of hedge fund reporting is considered an important investment criterion. In analyzing the spectrum of opinions, the authors identify critical points of conflict between investors and managers.They find that investors are especially dissatisfied with the quality of information on liquidity and operational risk exposure. The survey also reveals that inappropriate performance measures are prevalent.