More Disclosure Coming Soon for Hedge Funds |
Date: Tuesday, April 24, 2007
Author: Jeff Neal, Optionetics.com
Given all the attention that hedge funds have received lately it should
be no surprise that some action is about to be taken. A report crafted
recently by central bankers and finance ministers from seven leading
industrial nations are demanding that hedge funds disclose more
detailed data in respect to the specific risks involved and strategies
used.
The new report contends that for market discipline to
function effectively, both investors and counterparties need accurate
and relevant information. For this to be realized it is essential that
hedge fund managers provide information with enough detail and
frequency to inform investors and lenders of strategies, as well as the
amount of risk being assumed. Keep in mind, hedge funds are mostly
private, unregulated pools of capital where managers can buy or sell
any assets, participating quite significantly in the profits.
In
respect to the United States’ position, Federal Reserve Chairman Ben
Benanke says he would support a lighter regulatory environment than the
one advocated because hedge funds have enhanced the liquidity in
financial markets, generated innovation and reduced risks. The chairman
went on to say that hedge fund investors are sophisticated and the
banks that lend to them have an interest in ensuring that excessive
risks are not taken.
Of course, if there are many more Amaranth
hedge fund stories out there, look for the U.S. position to change.
Hedge funds typically carry a big price tag. Some charge management and
performance fees, which, combined, can easily exceed 20 percent. In
addition, large institutions simply will not keep paying hefty fees for
mediocre performance. Given this scenario, too much money chasing too
few opportunities often leads to frustrated investors. The current fear
is that hedge fund managers around the world are making riskier bets to
overcompensate for poor performance.
As a group, individuals
have been quicker to invest in hedge funds than all other types of
investments. Requirements ensure that most individual investors in
hedge funds are wealthy with a high annual income. Hedge funds may
impose other restrictions. Because of limits in the number of
investors, hedge fund managers often refuse small investments, thus
simplifying compliance and reporting.
Corporations have made
significant investment in hedge funds. The investments are small,
relative to the capital structure of most corporations, but remain one
of the largest sources of hedge fund capital. Corporations may invest
in hedge funds for a variety of reasons.
One company may seek to
reinvest capital until it is needed for the plant or equipment. Another
may simply use hedge funds as a fairly low-risk way of increasing the
returns. Others may want to put additional assets on the books to
cushion other risks the corporations face. Relative to the powerful
factors that can influence corporate earnings, hedge fund returns are
fairly predictable class of assets.
Despite the popularity of
hedge funds, along with its diverse client base, look for major changes
in terms of disclosure to be coming shortly. Both the strategies
employed along with possible risk will most certainly have to be
detailed going forward.
Jeff Neal
Senior Writer, Options Strategist & Profit Strategies Radio Show Market Correspondent