The Alternative Investment Management Association (AIMA) has commissioned Capital Market Risk Advisors, Inc. (CMRA) to conduct AIMA’s first comprehensive review of fund of funds investing due for release by Summer 2002. As part of this project, a series of surveys were issued to institutional investors, fund of funds managers and hedge fund managers to question them on various issues, such as risk management and transparency.
The analysis of the survey responses is on-going although the results will represent only one thrust of the research. However, we are releasing a summary of the results on transparency at this time because of the importance of this issue to many funds and investors.
Transparency – Summary
• Only 7% of fund of funds and 4% of individual hedge funds indicated that they have had potential investors decline to invest based on lack of transparency, but 64% of investors claim they have declined to invest.
• 86% of investors indicate that transparency is an issue in selecting hedge funds and fund offunds.
• 69% of investors are satisfied with the information they receive from their hedge funds and fund of funds, but 29% of investors have had requests for information turned down by the hedge funds and fund of funds in which they invest.
• Only 14% of hedge funds indicated that investors request more information than theyreceive.
• 66% of fund of funds would find a standard set of “risk factors” very valuable or extremely valuable for portfolio construction and 55% for marketing/client reporting.
• Disclosing detailed position level information is deemed to compromise the performance of a hedge fund “significantly” or “materially” by only 24% of funds of funds and 36% of hedge funds.
• There is a significant gap between what hedge funds claim to provide and what investors receive.
• Investors and funds of funds perceive the situation differently.
• Investors regularly receive the following information from funds in which they invest.
• 60% of the investors who get full position level detail have their own tools to analyze, the remainder skim the information.
• When provided with detailed position information for the funds in which they invest,information is used in a variety of ways by fund of funds.
• Only 8% of hedge funds provide different information to fund of funds than to otherinvestors.
We plan to release the full fund of funds paper during the summer of 2002 that will cover:
• Diversification
• Comparison Bias
• The Future of Fund of Funds
• Advantages & disadvantages of fund of funds vs. individual hedge fund investing
• Transparency
• Portfolio constitution
• Performance and risk attribution
• Liquidity
• Service providers• Fees