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Hedge funds adopting more transparency, liquidity

Date: Friday, July 15, 2011
Author: Megan Harman, Investment Executive

Investor scrutiny is driving industry changes, report suggests


Hedge funds are adopting more transparency and liquidity as the industry adapts to sweeping regulatory changes and evolving investor expectations, according to a new report from State Street Corporation (NYSE: STT).

The report, entitled ‘Hedge Funds: Rebuilding on a New Foundation,’ examines the changes occurring in the industry in the aftermath of the financial crisis.

It notes that investors are demanding enhanced fund transparency, liquidity and efficiency from the hedge fund industry.

“The theme of transparency in the hedge fund and fund of hedge funds market continues to grow,” said Jim Tomeo, chief operating officer and senior portfolio manager at SSARIS Advisors, LLC, an affiliate of State Street Global Advisors.

In selecting hedge funds, investors are looking for six key operational and risk management elements, according to State Street. These include:

• investment strategy and performance
• portfolio liquidity
• portfolio transparency
• reconsideration of pricing and lockup periods
• operational due diligence
• the independence of custodians and administrators

“Institutional investors are increasingly taking great interest in how hedge funds manage operational infrastructure, choose administrators and provide for governance and best practices,” said George Sullivan, executive vice president and head of State Street’s alternative investment solutions group.

To meet the changing expectations of investors, funds are adopting new technologies that allow them to provide more detailed portfolio analytics, process transparency and manage risk.

Many funds are also outsourcing many responsibilities to administrators, including data management, asset class coverage and portfolio risk analysis.

Amid these changes in the industry, Tomeo said he sees signs of improved investor sentiment and positive inflows, which indicate reviving confidence for the hedge fund sector.