Amongst public relations professionals, there is an axiom that goes something like this: In the absence of the complete story, journalists are forced to create their own conclusions.
Many companies have learned that starving the news media of the facts they demand often backfires. In such a situation, journalists a) have no choice but to attempt to fill in the gaps with conjecture and b) often do so totally unchallenged. So “filling in the gaps” is actually a very rational response when you think about it.
A column on Monday by one of Canada’s most respected commentators makes this point in spades. In a piece entitled “Hedge Funds: the credit crunch’s enigma“, Globe & Mail columnist Eric Reguly makes a series of remarks about hedge funds that even he suggests is based on little, if any, hard facts.
Clearly miffed about another drive-by smearing, the Canadian Chapter of AIMA (the Alternative Investment Management Association) followed its parent organization’s lead this week by speaking out – this time in a letter to Reguly obtained by AllAboutAlpha.com yesterday.
As you may recall, AIMA’s London headquarters issued a rare rebuke of hedge fund media coverage last month in the form of a press release quoting the organization’s Chief Executive (see related posting, read press release). Taken together, these responses suggest AIMA is taking a more active stance on educating the media and the public at large about alternative investments. And that’s a good thing.
Here’s what Reguly said about hedge funds on Monday:
“…Whatever you do, do not – repeat, do not – think about the hedge funds. If you do, your breathing might become quicker. Your blood pressure might rise. That’s because the hedge funds are opaque. No one knows what’s in them. They might be fine. But they could blow up too, the proverbial next shoe to drop in the credit crunch’s (allegedly) waning days.”
“…Private and largely unregulated, the hedgies don’t have a strict mark-to-market burden. Their valuation requirements are flexible. If the instrument is, in effect, worthless because it doesn’t trade, big deal. It will just be held at par until the price rises to the point that another truckload of management fees can be collected.”
“…The hedge funds’ big potential danger, of course, is leverage, piled high and deep like cheap pasta. If they go, they could go with a great thundering crash, spreading destruction near and far.”
“…The hedge funds are obviously exposed to this market. How much isn’t known. Remember, the hedgies don’t have to tell you what’s inside the black box.”
“…Private and largely unregulated, the hedgies don’t have a strict mark-to-market burden…”
“…Relax while you can because the next few months could be horrific in Hedgeville.”
In a letter circulated to AIMA’s Canadian members yesterday, here’s how AIMA Canada Chairman Phil Schmitt responded:
May 26, 2008
Dear Mr. Reguly:
Re: Hedge funds: the credit crunch’s enigma â€“ Globe and Mail May 26, 2008
I am writing in response to the above-noted article in my capacity as a director of the Alternative Investment Management Association (AIMA) and Chairman of AIMA Canada. As you may know, AIMA has 1,300 corporate members worldwide in 48 countries, including 80 Canadian members and acts as the worldwide voice of our industry.
The point of view expressed in your article has certainly been seen before in the media â€• although less frequently in recent months as the transparency and understanding of the industry has improved. The premise of your article is based on exceptions to general practice and misapplying technicalities of mark to market accounting.
I’d like to make two points to clarify important issues raised in your article:
1) In reference to your suggestion that hedge funds do not have a strict mark-to-market burden, I would point out that hedge funds (be they regulated or not) require an annual audit. As with any audit function, generally accepted accounting principles, (GAAP), are used. GAAP is not hedge fund specific and, as such, all funds and financial institutions are subjected to GAAP, including the banks that you reference.
2) In reference to your statement regarding opacity, the practice of the hedge fund industry has improved significantly in recent years, but continues to be misconstrued. Hedge funds’ portfolios are held by prime brokers. Prime brokers have full disclosure of the positions they hold and apply regulated margin and collateral practices to bank the positions. So the parties servicing the hedge fund industry (i.e. prime brokers) have transparency and the regulators have oversight of the prime brokers.
AIMA has an important educational objective to insure that our industry is accurately portrayed to the investing public. To this end, I would be pleased to discuss these or other matters relating to the alternative investment industry with you at any time, either on the record or on background.
Phil Schmitt, CFA
Chairman, AIMA Canada
Schmitt and his AIMA colleagues are obviously sensitive about the dangers created by media misconceptions about hedge funds. But as we have argued before, one of the problems is that few in the hedge fund industry have the incentive (or often the regulatory freedom) to clarify these misconceptions on the record. And as you can see from the excerpts above, even Reguly himself acknowledges the lack of hard information upon which he is forced to build his arguments:
“…No one knows what’s in them. They might be fine. But they could blow up too…”
“…hedge funds are obviously exposed to this market. How much isn’t known…”
“…Private and largely unregulated…”
“…Remember, the hedgies don’t have to tell you what’s inside the black box…”
In fairness, an investor can be excused for being fearful of such an investment enigma. But for a journalist trading in facts, not emotions, it is somewhat surprising that a lack of information should evoke the rather ominous warning: the next few months could be horrific.
As you can guess, we applaud AIMA’s “activist” stance against media misrepresentations of hedge funds and we look forward to hearing more from the organization in the future.