Transparency of a hedge fund has always been an issue, but as larger institutions move toward investing in hedge strategies, it takes on more importance. Most institutions do not want to invest in a “black box” — they want to know what is in the fund and what the fund’s risk characteristics are.
This desire to know what is in the fund is in direct conflict with the fund manager’s desire to keep that information private. If a manager runs a proprietary methodology that adds value, why should the portfolio holdings be known to anyone? If they were, someone might figure out the strategy and eat up some of the alpha.
Some progress is being made on this front. To raise assets, some funds have agreed to the institution’s transparency demands. Others are opting for a partial solution, but never showing the detailed holdings of a portfolio.
Some prime brokers can provide summary data on a portfolio (risk characteristics, etc.). To many investors, this is satisfactory. A number of firms that specialize in risk analytics are working to develop standardized summary hedge fund risk measures to satisfy most hedge fund investors.
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