Hedge Fund Reader : Transparency a key issue in the hedge funds sector

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February 27, 2006

Transparency a key issue in the hedge funds sector

Transparency is a key issue when it comes to hedge funds. The same concern has been doing rounds even in the European Union. Although with regard to the transparency of hedge funds, some banks seemed to be quite satisfied with the information provided to them. This is despite reporting lags and the variation in existing practices.

The regular flow of information typically included net asset value and performance figures (changes in net asset value per share). This was coupled with risk management reports including some “Value at Risk” numbers in some cases. Most transparency related questions were part of the due diligence process and credit rating or scoring models. However, the relation between credit terms and transparency could probably be stronger.

Research shows that there are areas of improvements when it comes to information sharing and transparency issue:
The counterparty discipline applied by banks, was found to be under pressure due to the aggressive and highly competitive market conditions. Especially, the larger hedge funds were able to negotiate less comparatively rigorous credit terms.

The stress tests done by the Banks’ typically only include historical scenarios. Also, these were often only applied to individual hedge funds. Industry experts opine that stress testing of collateral can be made much stronger.

One more area that needs attention is the aggregation by banks of their hedge fund exposures across the entire financial group and/ or different business areas/geographical regions.

Also the reporting on hedge fund disclosures and information on leverage still needs much to be desired. Although this aspect has made some progress in the last few years, it is yet adequate. In many cases, hedge funds still provided banks with relatively crude measures of leverage.

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February 27, 2006 in Research | Permalink