Investors Doing More Scrutiny of Hedge Funds' Risk-Management Practices

Date: Tuesday, February 13, 2007
Author: Canadian Business.com

KEY BISCAYNE, Fla. (AP) - Investors are giving hedge funds' risk-management practices much more scrutiny than they did in the past, and hedge fund managers as a result are facing some difficult decisions in determining how much they want to reveal.

As more and more of these loosely regulated investment pools vie for institutional money, they are likely to be expected to reveal more, hedge fund experts said here Tuesday at the Managed Funds Association Network 2007 conference for the alternative investment industry.

The recent initial public offering of Fortress Investment Group LLC is likely to result in other hedge fund IPOs, which will mean more transparency that will, in turn, make institutional investors more comfortable, said Michael Balkin, chief investment officer at Magnetar Investment Management, the investment management arm of the hedge fund Magnetar Capital.

"Fortress is a real positive for the rest of the industry," he said. There is currently a convergence going on between private equity and hedge funds, as well as traditional asset managers, Balkin said. As they merge and more hedge funds start going public, it will give comfort to the institutional marketplace, he said.

Tracy Wills-Zapata, a managing director at alternative investment manager Campbell & Co., responsible for its institutional clients, said deciding how far to go in revealing information can be a delicate decision.

"If we share information with one client, we have to share it with all clients," she said. "There is definitely some difficulty in trying to determine where that fine line is" between sufficient disclosure versus full-position disclosure, she said.

John Roe, chief operating officer at Abrams Bison Investments, said that as long-term investors, when his firm files 13F forms, "we're basically opening our kimono." Hedge fund managers of portfolios of more than $100 million of public securities must periodically file 13F forms with the Securities and Exchange Commission listing their largest holdings.

Abrams Bison fought that requirement by seeking confidential treatment from the SEC, but found such treatment "extremely difficult to get these days," Roe said. Nevertheless, Roe said his firm may be better off with the revelations because with the information, investors have "a lot more comfort with what we are doing."

Balkin said proper risk-management policies and procedures are "one of the key things investors will focus on," and must be in place "before institutional investors will accept hedge funds in a big way," Balkin said.

Roe said it is getting "harder and harder" for single-strategy managers to establish themselves. "It takes a lot more transparency" than it used to, he said. "Investors have to know how risk will be managed."

Such a focus on procedure and processes could discourage the most successful hedge funds from wanting those types of investors, said Wills-Zapata. "They won't want clients that are all about ticking the boxes," she said. "We try to get our investors away from just ticking the boxes and try to educate them about our strategies and discipline."

Balkin said that with the ongoing convergence, "we may not even use the word hedge fund in five to 10 years." Instead, managers may be referred to as "performance-based asset managers," he said. "I would like to see headlines that don't even use the word hedge fund anymore because I think that scares people."