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Hedge Fund Research more necessary now than ever

Date: Friday, February 20, 2009
Author: Stefan Maisnier, Medill Reports

Chicago-based Hedge Fund Research Inc. has positioned itself as a leader in hedge fund information at a moment when transparency is paramount for fund managers and investors alike. Capitalizing on market uncertainty, it's a growth business.

HFR, with offices at 10 S. Riverside Plaza, maintains databases that track more than 7500 active hedge funds, broken into more than 70 different data fields.

The firm has about 500 subscribers to its databases at yearly fees ranging from $4000 for a one-time download to $27,500 for a two-year “master subscription.”

Its database subscriber base expanded by 15 percent in 2008, the company said. 

There are also “tens of thousands” of online subscribers who have access to dozens of different HFR indices and the option to purchase any of the numerous reports that HFR produces, said Chief Operating Officer Scott Esser.

“HFR provides an additional layer of transparency,” said Neal Goyal, managing director of Chicago-based Caldera Advisors LLC.

Caldera launched a new fund this month and one of the first things it did was begin the process to register it with HFR.

“It was quite easy,” Goyal said. “Their primary goal is to make it easy for hedge fund managers.”

“It’s about getting our name out there,” said Penny McKenzie, senior marketing executive with SG Capital Management LLC. All five of SG Capital’s funds are listed in the HFR database.

The hedge fund market has grown exponentially from a few hundred funds in the early '90s when Joseph G. Nicholas founded HFR to a peak of more than 10,000 funds in the summer of 2008.

“Still, it could be conceived as relatively new,” HFR President Kenneth Heinz said about the hedge fund market, “and depending on one’s perspective, obscure.”

Hedge funds generally have some of the highest minimum investment requirements and expensive performance related fees, costs that were acceptable for investors from 2002 to 2007 when the market was characterized by rapid growth and “historically low volatility across all assets at the same time,” according to Heinz.

A staggering $1.93 trillion was invested in the hedge fund market, mostly by institutions and wealthy individuals, at its 2008 peak, before falling to about $1.4 trillion at year’s end, HFR stated.

Hedge funds averaged losses of 19 percent for 2008, but was essentially flat with a 0.4 percent average return in January according to HFR.

“The only asset that was in favor by the end of the year was really government bonds,” Heinz said. “People were so pessimistic as to accept a return of capital six months from now that essentially yielded nothing, in
return for the security that it would be yielding you nothing, that’s very extreme.”

Scandal has also dogged the hedge fund industry, none bigger than the alleged Bernard Madoff Investment Securities LLC Ponzi scheme.

Although Madoff himself wasn't running a hedge fund, some hedge funds gave large asset pools to him to manage, and by doing so contributed a large part of the alleged $50 billion lost.

Some funds now are seeking to achieve greater transparency within the investment community by registering with HFR.

Heinz said he sees transparency as a two-step process of regular, systematic information dissemination by funds and making certain investors are made aware of risks by fund managers and by third party analysis.

“People start asking for something enough times and it starts to become standard dissemination,” he said.

Seventy percent to 80 percent of the funds listed in the HFR database ask to be included, according to Heinz. “People think about the process of including the fund in the HFR database as something that’s very integral in the process of marketing their fund,” he said.

HFR operates with about a dozen employees.  It has an affiliated firm, HFR Asset Management LLC, with another 50 or so.  All of the HFR funds are listed in the HFR database, and operate with full transparency, according to Esser.

Although most new or recently released funds approach HFR, the company keeps up on industry news and releases and will ask funds to join the database on occasion.

There is no charge for funds to be listed in the HFR database.

“It’s kind of free marketing on their behalf to get in front of an audience of accredited investors who might be running some risk metrics off of our database,” Esser said.

A concern for hedge fund managers is that funds have specialized strategies and requiring full disclosure could make them sacrifice the secrets of their success.

Because of its clientele of only accredited investors--investors with substantial income and assets--and hedge fund managers, those fears do not apply to HFR, according to Goyal.

Funds are asked by HFR to be included in the separate indices, but in order to be part of an index, funds must submit to separate reporting requirements.

“Everything that they put on their site is highly verified,” Goyal said. “Potential investors can have more faith in what is said.”

“If it looks kind of fishy to us, we just won’t list it,” Esser said, noting that there may be one or two funds yearly that are rejected from the database, if that.

In its newest descriptions for 2009, HFR said the database culls from five “buckets of strategy:” equity hedge, event-driven, macro, relative value, and fund of funds.

Equity hedge focuses on buying undervalued stocks and short-selling overvalued stocks. Event-driven is based on strategy surrounding events that have impacted a company’s value.  Macro is focused on strategies designed to eliminate a portfolio’s risk like currency investments. Relative value is a strategy taking advantage of price inefficiencies or irregularities. Fund of funds focuses on how the other four strategies are integrated by funds of funds.

Even beyond that level of classification, HFR breaks funds into regions and sub-regions to target the information to more diverse customers. Approximately 40 percent of the database subscribers are based outside the U.S., according to Esser.

HFR is constantly updating its indices internally and at the end of 2008 it took an even bigger challenge by looking across the strategies and came up with four new sub-strategies.

For some though, industry transparency is more important than the analysis.

“They should probably offer even more tools to provide that transparency,” Goyal said, outlining three initiatives he would like for HFR to incorporate: verifying every marketing item provided by a hedge fund, allowing for investors to ask HFR to perform more due diligence with a fund on their behalf, and providing references to current fund clients and fund managers for potential investors.

“You can’t say that if you don’t have your fund in the HFR database then I think this, that or the other thing,” Heinz said, “but what we have seen in the last 12 to 18 months is that many of the larger firms, maybe 10, that just call us out of the blue, and say, ‘we’d like to be included in your database.’ And that’s great.”


While greater transparency seems a good idea, Esser said it may not be entirely the government’s domain.

“Madoff was actually registered [as a broker-dealer] with the SEC,” Esser said. “There are still a lot of questions to be answered.”