Hedge fund managers don’t like to tip their hands. Letters to investors are often put off for as long as possible so that they reveal what positions were instead of what they are right now, and even then they will often just outline long equity positions instead of explaining all of the fund’s investments. Tactically this makes sense, but hedge fund managers need to anticipate changing regulatory standards and client expectations with better communication.
Standardizing hedge fund communications
“Hedge fund managers currently provide investors with performance data, investor letters and risk reports. However, the frequency of and detail in the reports are left to the discretion of each fund manager,” writes Intralinks in a recent whitepaper. “Proposed hedge fund regulations, along with the MFA and AIMA guidelines, attempt to bring consistency to how a fund should communicate with its investors.”
Dan Loeb's Third Point returned 11% in its flagship Offshore Fund and 13.2% in its Ultra Fund for the first quarter. For April, the Offshore Fund was up 1.7%, while the Ultra Fund gained 2.3%. The S&P 500 was up 6.2% for the first quarter, while the MSCI World Index gained 5%. Q1 2021 hedge Read More
Intralinks sets three business goals that it thinks hedge funds should follow to both remain competitive and to stay in regulators’ good graces: improving transparency; sharing information equally and simultaneously with qualified prospects; and managing material information for quick retrieval and clear accountability.
The default secrecy that many hedge funds fall back on could become a liability as investors insist on knowing how the fund impacts their overall exposure. Not being able to provide all material information on a trade to regulators in a timely manner could only invite more scrutiny and waste resources better spent elsewhere. Having better standards that all fund managers follow would eliminate some of the guesswork and put everyone on an even playing field.
Technology doesn’t solve the problem
Balancing the need to prevent rivals from learning too much with the goal of addressing client concerns is important, and will get more press as inflows to hedge funds continue. It’s no surprise that Intralinks (which sells SaaS products for finance and other industries) thinks that the cloud can solve all the hedge fund industry’s problems, but the reality is more complicated.
Ad hoc communications using some combination of e-mail, overnight delivery, and password protected web pages expose hedge funds to security breaches. But a SaaS portal is more of a deterrent than a preventative measure. As a rule of thumb, if it can be viewed it can be copied and shared (which is why no amount of DRM has stopped people from pirating movies and music). Passwords can be shared and emails can be forwarded without any difficulty, but a SaaS portal only adds a complication. Even without finding software to bypass copy protection, there’s nothing to stop a client from taking screenshots or snapping pictures with an iPhone.