Mark Hynes - thoughts on corporate disclosure

Opinions on changing rules, changing best practices, and their effect on investor relations officers.

Thursday, January 04, 2007

When a senior fund manager speaks on hedge funds, one tends to listen.

Blake Grossman, CEO of Barclay's Global Investors, says that hedge funds would soon be classified as mainstream with consequent new trillion-dollar markets for average investors. Since this summer, U.S. investors in mutual funds have been putting twice as much money into foreign stocks as in domestic shares, with Americans looking for currency hedging diversification.

The traditional view is that hedge funds have no interest in winning smaller investors. Not anymore. Fund companies have rushed to capitalise on the popularity of hedge funds by offering mutual funds that use similar techniques. The so called long-short funds have attracted investor support, but the performance of these funds has been all over the place, some losing money.

Many believe therefore that hedge funds will recede in popularity with institutions, but become more accessible to the public.

For hedge funds, the attraction of retail investment is money that can't – or typically won’t - be withdrawn on a quarterly or annual basis. As hedge funds make more long-term investments, they want to make sure that investors don't withdraw money before the bets reach fruition. (It is also interesting to note that the first Sharia-compliant hedge funds are launched by the London prime broking arm of Societe Generale).

Among the drivers of all this retail investor interest is the activist approach of hedge funds and the idea of consequent improved returns. Until this month, there had been no serious academic studies to measure the link in this country between activism and improved returns. But now a paper published by a London Business School team, including Professors Julian Franks and Colin Mayer, has tracked the investments of the Hermes Focus Fund in the half-dozen years to 2004. It finds the results are startlingly good - an annual excess return after fees of 4.9% a year above the FT All-Share over the six-year period.

Nonetheless, Investor Relations professionals have long been worried about the transparency of hedge funds. With hedge fund favourites CFDs not regarded as “material”, tracking who is on one’s share register is tricky. And if hedge funds – and their mutual fund cousins – expand on the back of retail investor cash, those concerns will remain. Their concerns now appear to be shared by the regulators.

The United States has said it supports Berlin’s bid to increase hedge fund transparency during the German presidency of the Group of Eight nations in 2007, according to Reuters. German government officials said. “Through more transparency, risks to the stability of the financial system should be prevented and investors better protected”. And it is not only the Germans. In France the regulator AMF has warned on over-zealous hedge fund activism. “Hedge funds sometimes take shareholder activism too far”, the chairman of France’s Autorite des Marches Financiers told the European Parliament’s economic affairs committee.

Against this background, improved transparency looks not only likely but thoroughly needed.


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