A new survey from the EDHEC Risk and Asset Management Research Centre, the EDHEC Hedge Fund Reporting Survey, shows that even before the Madoff scandal, investors were dissatisfied with the quality of information on liquidity and operational risk exposure and had noted the dangers of inadequate reporting.
The survey, which targeted hedge fund managers, hedge fund investors and fund of hedge fund managers, was taken in the summer of 2008. The first response was received on 4 July 2008, the last on 1 October 2008. Nearly 90% of the 214 respondents to the survey are based in Europe, many of them in the UK, Switzerland, and France.
In analysing the industry’s spectrum of opinions, the authors, Felix Goltz and David Schroeder, identify critical points of conflict in the alternative investment business. 92% of all industry practitioners believe that the quality of hedge fund reporting is an important signal of a fund’s overall quality, and thus pivotal for investors’ decisions about hedge fund investment.
However, information disclosure is not viewed as adequate by investors. Although they are satisfied with the information on past hedge fund returns, the information on fund liquidity and operational risk exposure is regarded as incomplete.
The industry views issues related to the pricing and the valuation of hedge funds (identified by more than 76%) as the most crucial elements of operational risk reporting. Information on internal risk management (60%) and internal controls (48%) are also seen as major aspects. When asked whether the information provided on operational risk is sufficient or meets their demands, investors reply that exactly those aspects that are considered most important are those that are considered most wanting; that is, information on a fund’s valuation framework and on the internal controls a fund puts in place.
Liquidity risk is considered a major source of risk for hedge funds, especially for hedge fund investors, more than 80% of whom classify this source of risk as “very important”. Yet this clear view contrasts sharply with the industry’s satisfaction with the current coverage of liquidity risk in hedge fund disclosure. Some 80% of all respondents state that liquidity risk is not sufficiently captured in hedge fund reporting.
To downloaded a copy of the survey, please go here.
D.C.