Think hedge funds are secretive? Think they do their best to communicate with investors as little as possible and get visibly upset when investors call? You’re not alone. Stereotypes of the super-secret hedge fund abound. But in the absence of specific regulation, how much transparency is enough? As the Journal of Wealth Management once wrote:
“Hedge fund transparency is like pornography–it is hard to describe, but you know it when you see it. A great debate currently rages over the extent to which hedge funds should disclose their investment portfolios. Advocates of transparency argue that hedge fund managers should be held to the same standard of disclosure as their other investments.”
So are hedge fund managers “held to the same standard of disclosure as other investments”? According to an extensive survey of hedge, private equity, real estate, infrastructure and commodity funds released last month by PwC, they may actually be. In fact, the survey finds that hedge fund managers report more frequently than managers of other alternative assets.
This table from the report shows that more hedge fund managers report to clients daily, weekly or monthly than managers in almost any other alternative asset category. Only commodities managers give the hedgies a run for their money in the reporting department.
More infrequent, quarterly reporting, is almost unheard of in Hedgistan while nearly half of private equity and real estate managers report to clients only 4 times a year. (note: we left off “occasionally” and “not applicable” to fit the chart on this page).
In fairness, client reporting is a whole lot easier for a hedge fund manager who invests in publicly-traded securities than it is for an infrastructure manager who owns, say, an airport and a subway system. Some might argue that managers of extremely illiquid investments like this should not be held to the same standard as hedge fund managers. In fact, respondents to the PwC survey said they were less comfortable with the (higher) frequency of hedge fund reporting:
More frequent reporting, but still “not frequent enough”. What gives?
When investors criticize hedge funds for not communicating, they usually refer to a perceived unwillingness to report information that could otherwise be reported, not information that is obviously not available even to the manager (e.g. the value of an airport or a private company). A private company is one of the most opaque investments imaginable for the minority shareholder. So opaque, in fact, that investors have come to accept far less transparency from private equity managers than they do from hedge fund managers – apparently without expressing frustration over the matter.
The survey also says that half of investors are “satisfied with the current regulatory environment” for hedge funds – about the same proportion as other alternative assets (although hedge funds have what pollsters might call higher “disapproval ratings”)
And when asked if greater regulatory oversight would hurt performance, investors expressed the most concern for hedge funds.
In summary, hedge funds don’t have to report (in fairness, neither do most of the other alternative investments in this survey), yet they do so with surprising frequency. But despite this relatively frequent reporting, investors remain unimpressed. In fact, they express concern over mandating more transparency. Go figure. It seems that the debate over “transparency” (whatever it actually means) may not be quite as simple after all.