AUM clouded by double counting and leverage

Date: Friday, July 18, 2008
Author: HedgeWorld

“Unless you’re a manager’s auditor, it’s hard to know what assets under management are because managers take license,” says Richard Klitzberg, founder and president of Klitzberg Associates, a third party marketer.

Leverage and double counting are among the ways that managers can “expand” their assets under management.

Double counting

Some large firms have intra-holdings e.g. single funds and funds of funds which can result in massive double counting if the funds of funds allocate to the single funds and the assets are counted by both.

Some large firms may also own minority stake(s) in other hedge fund(s) and count all of their assets as their own.

Master/feeder funds also present some concerns. If the manager has $50 million in the master/feeder and reports $50 million for both the US and offshore funds, that would be double counting, says Meredith Jones, managing director of PerTrac.

John Trammel, president of New York-based Cadogan Management, feels that one of the biggest problems in counting assets is structured products. “If you knew how much was in the hedge fund industry that came from structured products, then you could discount based on how long they’ve been in existence and what their performance has been.”

Most managers count all the money that is in structured products as being invested in hedge funds. Trammel says if it is a new structured product, then 20-30% of it may be invested in zero coupon bonds and the rest invested in hedge funds. “Over time, if the performance hasn’t met the bond floor target, then less and less of it is managed until it could be as little as 10-15% invested in the fund itself and the rest invested in zero coupon bonds,” he adds.

Trammel concludes that it is an extremely difficult thing to calculate - to know exactly what is invested through structured products, the duration and the various factors that go into it. “There is large sum of money counted as assets under management in this business where fees are not paid to the manager.”

To get a handle on how leverage affects a manager’s assets, Jones specifically asks the manager about straight assets - assets before leverage. “If an investor is doing due diligence on a firm, it’s helpful to know how many assets they manage and control - an investor can look at the actual assets that have been invested with them and the actual assets that they invest out.”

Jones makes a distinction between assets that are publicly available through the manager’s website or an article in the press compared with what an investor might get. “If a manager discloses an asset level, you’re going to end up with what the manager wants to give you,” she adds.

As would be expected, double counting managers’ assets, magnifies overall hedge fund industry assets.

Trammel says, “As a starting point, I figure that probably $500 billion in assets are doubled counted - not just exaggerated - in industry assets under management. This is just because of managers rounding up.”