Hedge funds flying in face of transparency calls

Hedge funds have always had a reputation for secrecy but the recent crisis engulfing the industry is prompting some to become private to the point of paranoia.

SRM's decision to sue the Wall Street Journal for printing the terrible performance of its Monaco-based SRM Global hedge fund, which lost its original investors 85 per cent in a little over two years, is at the extreme of industry reaction.

However, plenty of other funds are cutting back the information they share with investors, as intense interest in which hedge funds are in trouble has led to widespread leaks of performance data.

The rising secrecy flies in the face of efforts by regulators and parts of the industry to increase transparency. This month the G20 called for a unified code of practice for hedge funds. The European Commission is due to present proposals for hedge fund and private equity oversight next month. And in the US, Hank Paulson, Treasury secretary, is reported to have reversed his opposition to regulating the industry.

"Transparency is going to become a bit of a mantra in most places and it is probably one that will be taken up by the G20," says Andrew Baker, deputy chief executive of the Alternative Investment Management Association.

"But is it transparency of holdings, transparency of transactions, transparency of who the underlying investors are or of what the performance is?"

Some hedge funds, particularly in Europe and Asia, are open about their performance, even publishing letters to investors on websites. But others - including many of the biggest - tell investors not to pass on data.

In the US, almost no hedge funds make their performance public, and regulations that ban marketing are interpreted as restricting release of data.

These performance data are now in great demand, not just by the media but also by rival investors ready to exploit problems at a hedge fund by betting against its investments in the expectation that it will be a forced seller.

As a result, many funds have removed their performance even from subscriber-only industry databases, according to Hedge Fund Research, which operates a large database. A Frankfurt-based consultancy, eHedge, which operates a performance database, says two or three funds a day were asking to be removed as they hit trouble.

In September, Atticus Capital - a high-profile New York fund - briefly stopped sending out mid-month performance updates to its investors, because they had been passed to newspapers, including the Financial Times.

"Among other things, these breaches have been the direct cause of recent, false market rumours regarding the funds," it stated in a letter, which was immediately leaked to the New York Post.

False rumours that Atticus was going out of business were widely circulated after the FT reported in August on the poor performance of its two main funds, prompting investors to bet on falls in shares it held.

TPG-Axon, a large New York hedge fund run by former Goldman Sachs trader Dinakar Singh, delayed sending out its quarterly report and cut back its investor update because of leaks.

In a letter, which was leaked to the Dealbreaker website, TPG-Axon says: "We cannot afford to have sensitive information regarding positioning, portfolio composition, and strategies leak so quickly."

It is looking for technology to restrict the circulation of information.

Such digital rights-management technology, more often used to prevent music and film piracy, is already used by funds such as London's Red Kite and San Francisco's BayStar to control access to information sent to clients, with mixed success. Red Kite's main Metals fund is up almost 3 per cent this year, according to an investor, after gaining more than 20 per cent in October.

Still, many funds have stepped up their discussions with investors in recent weeks in an effort to keep their confidence amid steep market falls and fears of widespread withdrawals.

Vineet Kapur, head of capital introduction at Morgan Stanley's prime brokerage in New York, says problems in the industry will lead investors to demand more transparency.

"Some managers might not be sending out letters or mid-month valuations but they are doing a lot more hand-holding of their investors," he says.

The Hedge Fund Standards Board, set up by

leading London managers, says transparency is at the heart of its voluntary code of practice, although disclosures to regulators need to be appropriate.

Thomas Deinet, executive director, says: "We're very much in favour of making things more transparent. But you have to think about what is actually helpful to regulators.

"It is important that the information they receive would be of practical relevance to them," Mr Deinet says.