Call for more transparency in hedge funds

Fund managers have grown increasingly conscious about demand for higher levels of transparency from their clients, but a consensus is yet to be build on the degree, fund managers told Emirates Business.

"The open question is what level of transparency is useful. There is no consensus on that so far," said Rehan Syed, Head of Portfolio Management, ABN Amro Private Bank Middle East.

Sceptical of international markets, investors who lost money in the past 18 months have been seeking higher transparency and liquidity. With improvement in the economic environment, investor confidence is returning, market players said.

"There are good reasons for wealthy individuals to allocate more to hedge funds. But in order to do so they need comfort on transparency and liquidity. It doesn't mean that everything has to be liquid, but if the hedge fund managers promise a certain level of liquidity, they need to deliver it. It's about having respect for customer and delivering. That will increase flows to hedge funds," said Mark O' Hare, Managing Director, Prequin, UK.

Addressing issues of transparency and liquidity would enhance flows towards hedge funds, finance industry players and fund managers said. "It's absolutely clear that investors are coming back to hedge funds and diverting significant inflows of capital to hedge funds. In fact, in terms of returns, if you look at the track record of hedge funds they did pretty well during the financial crisis," said Hare.

However, investors need clarity on the levels of transparency and how to use the information.

Syed said: "If you look at the ultimate level of transparency, where a hedge fund discloses all its position levels, the question is what do you do with that transparency. Is a typical investor capable of processing the information and draw useful conclusions? Is it to essentially improve your asset allocation process by overlaying the hedge fund allocation on to your allocations in other asset classes and then extract useful conclusions out of composite allocation or is it to second guess the hedge fund manager and take an evasive action? Those are two different goals. I think a clear consensus on the topic on what level of transparency is beneficial is still some what lacking."

"The issue is not whether transparency should be there or not. The issue is, do you know the right questions or do you know the data that comes out of a hedge fund manager," said Syed.

He said the onus is on hedge fund managers to have transparency but the burden is on the client to properly assess what the goal of that hedge fund strategy is and what the match is between the strategy and the clients' portfolio.

"Since the whole paradigm in financial markets is now changed, hedge fund industry also has to change and evolve. If industry offers transparency, better liquidity provisions, better pricing, better ability to identify what they are investing into, they would be able to do better with their investments," said Sumeet Bhambri, Head of Wealth Management, Standard Chartered, UAE.

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