Predictably, the attention has now turned towards the hedge fund industry. Largely this is due to historical perceptions of the industry as being shrouded in secrecy, with enormous personal gains for practitioners. Whilst the overall investment management industry needs to look at investor needs for further transparency and information sharing, it is essential that the hedge fund industry does too. This is likely to result in changes to ensure that hedge funds remain an important asset class in investment allocations and continue to make a useful contribution to the modern financial system. Given that alternative asset management as a brand is in danger of being tarnished beyond repair, it maybe time to apply a grass roots approach to redefining the industry as we know it today.
Like the current MP expenses scandal rocking Britain’s Parliament, it has taken a massive market shock to highlight shortcomings in hedge fund transparency. The sharp fall in asset prices and subsequent investment performance, coupled with intense scrutiny post-Madoff (and many other smaller frauds), has highlighted the need for hedge funds to address the soaring demands of investors for more clarity and understanding of what they have really invested in and whether these investments fall within guidelines. Both institutional and private investors are challenging hedge funds over failings with the most basic levels of due diligence along with heightened media coverage of the lavish lifestyles of some fund managers.
Obviously it is important to get the context right. Hedge fund performance may have been somewhat lacklustre over a number of sustained periods, but it is wrong to blame the hedge fund industry for the condition of financial markets. Yet the industry, while certainly not absolved of responsibility, has a brand problem that means it must carefully address four keys facts. First, what does it mean to be called a hedge fund and does this brand need to be changed? Second, what structures can be put in place to give investors more asset protection and better transparency? Third, what does it mean to be transparent and what measures can the hedge fund industry put in place to alleviate concerns over transparency, whilst protecting their franchise and the need to keep trading strategies and market positions confidential? And, finally, how do managers put in place client retention strategies to ensure that clients remain focussed on longer term investment returns? Let’s consider each of these fours points briefly.
The hedge fund brand
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