A question of privacy for hedge funds

But in the past few weeks, the highly public scrutiny of the pay and private lives of several hedge fund managers has elicited some sympathy on their behalf.

First, it emerged that Ferox Capital Management is suing its auditors for releasing its 2004 accounts to Companies House several months early, which the fund claims triggered a wave of negative publicity over the £11.4m its then 35-year-old founder Jeremy Herrmann had earned.

Then, the accounts of hedge fund manager Sloane Robinson showed the top-earning partner made more than £58m in the 16 months to March 2006. And, finally, one newspaper published a particularly intrusive profile of one of the UK’s most successful hedge fund managers that focused more on his private life than on his business performance.

This has resurrected the issue of whether the pay of individuals and results of privately held companies should be reported at all and, if so, how they should be treated.

Many hedge fund managers – and their high-earning counterparts in private equity and investment banking – argue their pay should be kept private. They see such coverage as sensationalist voyeurism driven by envy and titillation. More seriously, they argue it presents a security threat to them and their families. And, as privately held companies that make a habit of secrecy, they say their pay is nobody’s business but their own.

In many cases, they are right on the first two counts. But it does not logically follow that details of their pay, when they are in the public domain at places such as Companies House, should be kept private.

First, the remuneration of hedge fund managers is part of a legitimate debate about the efficiency of the industry and the extent to which their fees are sustainable and justifiable. The pay they earn is a function of the high fees they charge investors – usually 2% management fee and 20% of performance, but sometimes higher. As the hedge fund and private equity industries grow they have a wider impact on the public markets, making it harder for them to claim privacy for themselves.

Both industries are sucking in money from pension funds that are under regulatory pressure to get a better handle on their costs and become more accountable to their members. For example, when Europe’s largest pension fund ABP announced last week it would allocate up to one third of its €209bn in assets to alternative assets, it has a right to know how much of its fees will go towards buying Mayfair townhouses and country estates for hedge fund managers.

These fees have shown themselves to be immune to competition and not correlated to long-term performance. When a hedge fund performs, it may appear to justify its fees and pay levels. When hedge funds underperform – as many have done for the past three years – many of their managers continue to earn vast sums because of the 2% management fee and 20% of even meagre performance. In either case, a higher level of transparency helps put pressure on hedge funds to justify their fee structures.

Second, hedge fund managers in the UK have made a deliberate trade-off between the benefits of working in London – such as light regulation, low tax and available talent – and the transparency requirements of being based there, such as registering with the Financial Services Authority and filing annual accounts.

If they do not wish to undergo such scrutiny, they can either not become a director (as Bob Diamond at Barclays Capital and Andrew Pisker at Dresdner Kleinwort Wasserstein chose to for years) or, like Vega Asset Management or Philippe Jabre’s new venture, base themselves elsewhere.

The third issue of security is more difficult. Without drifting into social commentary, the widening wealth gap in cities such as London has perhaps made it a more dangerous place for the super-rich. For the time being, directors wanting to hide their home address for security reasons have to make an individual claim to the Department of Trade and Industry. Wealth alone will not be accepted as sufficient grounds until new laws come into force next year.

The issue of security makes it incumbent on the press to report such matters as responsibly as possible and, in particular, to avoid guesswork, wild speculation and Hello!-style reporting. But, given that no one forces hedge fund managers to do their jobs, charge the fees they do, or pay themselves what they do, it is incumbent on them to win the argument on fees and remuneration before starting the argument over whether it should be disclosed.

wwright@efinancialnews.com