The hedge fund industry is still growing and with pension funds investing in them, there is need for greater transparency.
That’s according to Gary Witt, managing director, alternative investments with Moody’s Investor Service in New York. Speaking at a CIBC Mellon breakfast seminar in Toronto, Witt estimated that global hedge fund assets under management stand at roughly US$1.4 trillion.
In Canada, the industry is much younger and has assets of approximately $25 billion. “As hedge funds use more leverage, they are getting longer terms on borrowing but to do that they have to be more transparent,” he said.
Because hedge funds “are opaque and not transparent” measuring operational infrastructure is key to determining if the hedge fund is under sound management. Many of the reasons for hedge fund failure, noted Witt, include misrepresentation of investments, misappropriation of funds and unauthorized trading.
Witt stressed that proper due diligence of hedge funds would include document reviews and on-site reviews. It’s not too much, he added, to contact service providers, especially administrators. Witt stressed that any institutional investor seeking to do due diligence on hedge funds needs to make sure risk reporting and control processes are independent from portfolio management and useful in measuring the fund’s risk.
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