Transparency failings dog hedge fund industry: study

Date: Friday, October 16, 2009
Author: James Langton, Investment Executive

Hedge funds often aren’t forthcoming with investors about their regulatory troubles or their performance records, new research finds.

According to the research by a quartet of academics, 21% of hedge funds in their study misrepresent prior legal and regulatory problems, and 28% provided incorrect or unverifiable representations about assets under management, performance and other topics. Additionally, 9% of the sample said they had no legal or regulatory problems when in fact they did, and 6% disclosed some problems, but not others.

The findings are based on examinations of 444 hedge fund due diligence reports supplied by a major hedge fund due diligence firm hired on behalf of investors, and reported in research from NYU Stern finance professor, Stephen Brown, along with co-authors William Goetzmann from the Yale School of Management, Bing Liang from the University of Massachusetts at Amherst and Christopher Schwarz from the University of California at Irvine.

“Operational transparency is essential to financial intermediation. In the past, the industry has been opposed to transparency, and this study shows that some funds are unwilling to be forthcoming even to their own investors and potential investors. It is this lack of information, this lack of transparency at an industry level, that is of greatest concern and will come back to haunt the industry,” said professor Brown.

They note that because the fiduciary responsibility to assess the integrity of hedge funds currently rests with the funds themselves (versus with a regulatory body such as the U.S. Securities and Exchange Commission), this report may affect the investment strategy of institutional and individual investors and influence regulatory governance in the hedge fund industry.