Institutional investors investing in the hedge fund market are more concerned about issues around pricing transparency and liquidity risk than ever before, according to a recent survey conducted by investment management solution vendor SEI and consultancy firm Greenwich Associates. These issues have even surpassed concerns over poor performance of these funds, says Phil Masterson, managing director for SEI’s Investment Manager Services division.
The report indicates that the contributing factors towards raising these issues were last year’s investment scandals, market dislocations and regulatory scrutiny. “Investors remain committed to hedge funds but that commitment comes with increased expectations. The balance of power has clearly shifted and managers must meet the growing demand for transparency and increase their focus on operational effectiveness if they want to be successful in this era of the investor,” says Masterson.
Transparency has become something of a buzzword for the regulatory community over the last year or so and the report indicates this has filtered down to the hedge fund community, as well as those at the more traditional end of the buy side spectrum. These hedge fund managers are being compelled to institutionalise their responses to transparency demands from clients and regulators, says the report.
“Institutional investors expect far greater information regarding their hedge fund investments. In fact, those surveyed named transparency as both the biggest worry and the single-greatest challenge related to hedge fund investing. What’s more, a majority of investors have already acted on their transparency concerns. Over 70% reported requesting more detailed information from managers than they did a year earlier. While the type of information sought ranged from counterparty and leverage exposure data to sector and position level detail, over 80% of the respondents reported a focus on funds’ valuation methodologies,” the report states.
Data transparency is evidently a key issue across the market and nowhere more so than areas such as valuation methodology and counterparty risk exposure. The SEI survey results suggest that these hedge funds are being forced to invest in their data architectures and data feeds in order to meet these new requirements, much the same as the rest of the market. A-Team Group has noted this trend over recent years in terms of the wider market, as firms adopt a more creative approach to data workflow by adding in more automation and by dual sourcing pricing data, for example.
Investment in technology is not limited to the data space, however, as the focus is also on improving regulatory compliance and risk management practices. In the hedge fund context, the SEI survey indicates that one of the critical factors in manager selection is now compliance infrastructure, with nearly 50% of respondents citing it as “very important”. The survey also reveals that investors are concerned with issues such as liquidity risk and whether performance characteristics are in line with stated strategies. For fund managers to remain competitive, the survey therefore emphasises the need for firms to proactively enhance their transparency and investor communications and reporting.
Of course, vendor sponsored surveys are often driven by an agenda and it just so happens that SEI extended its longstanding partnership with risk management and corporate governance solution vendor RiskMetrics at the end of last year, aimed at providing an integrated risk management offering to SEI’s clients. The vendors are now offering risk management and reporting services directly integrated into SEI’s Manager Dashboard tool.