More transparency for hedge funds

It seems only recently that hedge funds were being demonised. Conferences hosted panel sessions where issuers queued to hear their strategies. Companies watched share registers anxiously to see activist hedge funds taking positions.

However as hedge funds increasingly become mainstream and a standard part of investment portfolios, initiatives are emerging that will change those perceptions.

In the US, Calpers and Harvard Management are among those working on a guide that will seek to shed light on an industry still seen by many as secretive and opaque.

The guide will look at the pros and cons of hedge fund investing, methods behind common hedge fund strategies, historic performance data and other considerations for potential investors. This guide is expected to be published by the London-based Alternative Investment Management Association around April.

Some of the AIMA committee members started investing with hedge funds over 10 years, at a time when institutional investment was rare. Recently institutional investors have become the main source of the industry's growth.

In another outreach initiative the Hedge Fund Working Group in London published last week a set of voluntary standards it wants U.K. hedge fund managers to comply with, after widespread calls from European politicians for greater regulation of funds' activities.

And in the U.S, two advisory groups set up last year by the President's Working Group on Financial Markets are preparing to come out with recommendations for the industry there.

And despite January’s appalling month for the markets, hedge funds – who are adept at working both sides of the market - will often attract more investment after market downturns, when their portfolios have historically outperformed falling stock and bond markets.

So with the crucial role played by hedge funds especially in turbulent markets, the transparency initiatives are to be welcomed.

What a difference crash makes.

Having spent the last few years being the bad guys, sovereign wealth funds are being sought after as potential sources of funds to assist expansion.

Sovereign wealth funds’ assets are increasing fast, however most have been highly secretive, and guesstimates by analysts vary considerably. According to the FT, Stephen Jen of Morgan Stanley estimates their assets are now approaching $3,000bn, and could climb to $12,000bn by 2015.

Politicians and business leaders in Europe have not been happy about a ‘sell off’ and proposed legislation to make it harder for sovereign wealth funds to take over flagship companies. The US strengthened its vetting process for foreign takeovers.

However, public companies seeking capital in the aftermath of the financial crises, are beating a path to the door of these investors.

These include a growing number of Japanese companies are stepping up investor relations activities targeting investors in the Middle East.

Directors in charge of IR activities at firms like Nippon Telegraph and Telephone Corp. and Sony Corp. have been visiting investors in the Gulf states. The companies are hoping to welcome sovereign wealth funds and other investors in the region to come on board as stable, long term shareholders.

And the change of perception in the intentions of sovereign funds has been boosted by their increased willingness to become more transparent.

For example, Abu Dhabi Investment Authority, the world's largest sovereign wealth fund, has hired Burson-Marsteller to handle its communications. The fund is traditionally highly secretive and largely refuses to comment on deals, and prefers to communicate solely with its network of leading banks and funds.So this new found appetite for transparency is welcome.

Considered one of the most professional sovereign wealth funds, with investments of up to $800bn, Adia has long argued that it is a portfolio investor that seeks limited stakes in companies and no control - a strategy that is not threatening and well understood by the institutions it deals with.

So expect investor relations teams from around the world to be adding some new destinations to their road shows.

And so the FSA Listings conference

The event that is the FSA’s chance to share with the market new proposed rules for UK Plc took place this week. Around 200 people attended, many of them advisors to companies in one form or another.

Since the last conference in March 2006, UK Plc – and the financial services markets generally - has seen a massive change in new and amended regulation. Most of this has been driven from Europe, and so would the tide continue? The impression gained was probably not. Much of the new proposed discussion was almost a ‘tidying up’ of regulation, fixing areas where concerns remain.

2 prime examples. First the structure of the listing regime itself. Confusion is seen to exist between primary listings, secondary listings and GDRs. At one level, the concern is that UK Plc is subject to a stringent set of domestic governance rules, whereas overseas companies are largely subject to their own rules. How to ensure that investors are confident that all companies are subject to an appropriate standard?

And similarly should the Official List be restricted? What about companies traded through MTFs operated by other RIE’s? The FSA discussion paper is open for comment.

Second example is one extremely close the the heart of most IRO’s. The IRS has long campaigned for the disclosure of economic interests owned in the form of CFD’s. Given the huge rise in the use of CFD’s, and the consequent rise – some say up to 30-40% - of companies are held in the form of CFD’s, pressure has been building on the FSA to require disclosure.

The FSA’s CP on the issue offered – in summary – 3 options: The first was do nothing – rejected by the FSA. The second option was a series of rather complex safe harbours which would be an administrative nightmare for brokers, and not result in any more visibility of who is influencing the ownership or voting of shares. The third option was simply to add CFD’s – and similar instruments – to the existing disclosure regime, but to disclose them at 5%. Since this holding could then be aggregated with existing direct ownership, the first the market would know was when a holding of 8% had been built up.

The IRS – and in fact I spoke for them at conference – argued for the third option but with the threshold being set at 3%, without the aggregation, so that it mirrors the existing Panel regime.

The mood of the conference on this issue had changed substantially, so I expect responses from the traditional investor organisations – and in fact brokers and others - to reflect the IRS view. With a deadline of February 12th, time to get our skates on in order to reply.

2008 – the year of interactive data?

No don’t switch off; I know dear old XBRL has been threatening to make it for so long, but I finally believe its year has come.

We have a world that is submerged in data. XBRL helps move us to a world where useful data - such as the financial results of a company - are more understandable and easier to process by software because it is "described" by agreed metadata.

The push to make this XBRL thing happen is in overdrive. With SEC Chairman Cox nearing the end of his term, and having pinned his colours firmly to the mast of XBRL/interactive data, it seems to me to be now or never. And there’s too much credibility on this line for ‘never’.

Recent moves:

The SEC has launched the Executive Compensation Reader - the first-ever online tool that enables investors to easily and instantly compare what 500 of the largest American companies are paying their top executives.

Nine software companies now have products that enable public companies to make quarterly and annual financial reports available in interactive data form instead of text form.

And its not just in the US; in India the new CFDS (Corporate Filing and Dissemination System) put in place jointly by the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE), now offers an XBRL enabled common platform for listed companies to file. This will be mandatory for new listings.

Countries as far apart as Japan, Australia and the Netherlands have taken positive steps to adopt XBRL in national standards for enhanced financial reporting.

But what will this mean for IRO’s? Re-skilling?

In the brave new world envisaged by its proponents, XBRL will allow the markets automatically to analyse a company’s financials, and derive their conclusions/ update their models much faster than previously. Done correctly, it should remove simple Excel keying and circular argument errors.

Financial analysis therefore becomes a given, with more time for analysts to build in what if scenarios.

Which therefore will allow more time for IRO’s to focus investors’ attention on the company’s equity story, delivering against the corporate strategy, and communicating information not available in the balance sheet (such as the 40-50% of the valuation represented by intangibles).


Of course we have heard this before, but time for the chief regulator of the world’s largest equity market is running out. 2008 is therefore a clutch year, and if (actually, make that when) more markets begin mandating use of XBRL, IRO’s will enjoy focussing on the real essence if IR.