Hedge fund investors to demand more data

Date: Thursday, July 2, 2009
Author: Reuters.com

Many hedge fund investors burned by last year's market meltdown will likely demand a system of checks and balances in which outsiders keep a closer watch over assets, data released on Wednesday show.

Pension funds, endowments and wealthy investors that have long funneled money into loosely regulated hedge funds will want to see more data detailing how their investments are valued and priced, researchers at State Street Corp found.

One problem last year was that many hedge funds invested in illiquid securities where they were unable to exit quickly when investors asked for their money back.

Many investors will also begin insisting on having outsiders such as State Street, the world's second-largest administrator for hedge funds, review positions. State Street administers hedge funds with about $250 billion in assets.

"In the next phase of the hedge fund industry, investors are almost certain to demand independent custody of their investments, State Street wrote in a research report.

For State Street, hedge fund administration is becoming a lucrative business. The company recently signed up prominent hedge fund manager Caxton Associates, LLC as a client.

For years, hedge fund managers were free to cultivate an aura of mystery in order to keep competitors from copying their trading strategies. Investors let managers lock up money for months or even years and asked for little information about exactly how the money was invested.

All that changed after last year's market collapse when the average hedge fund lost 19 percent and some celebrated funds, including Citadel Investment Group LLC -- run by Kenneth Griffin, the 41-year-old Chicago billionaire -- lost as much as 50 percent.

Now State Street researchers found that investors will "demand a heretofore unprecedented level of information access" that will include an overview of investment positions and near real-time reporting of valuations for illiquid investments.

The California Public Employees Retirement System, the biggest public U.S. pension fund with $174 billion in assets, has already asked 26 hedge funds to provide better reporting on individual securities.

"Other large pension funds are expected to follow suit," State Street wrote in its report.

The researchers also said the new demands by investors suggest they are regaining confidence in the $1.3 trillion industry. (Reporting by Svea Herbst-Bayliss; editing by Andre Grenon)