Hedge funds which fail to explain their investment processes to investors are their own worst PR enemy, according to Bob Parker, long-standing vice-chairman of Credit Suisse Asset Management.
Speaking to FT Mandate at the recent Fund Forum conference in Monaco, he said he was critical of any hedge fund which refused to reveal what it is doing on the grounds that trading positions would be compromised.
“If there is total transparency and clarity on what hedge funds are doing in terms of their strategies, then I don’t think they would get some of the flak that is being thrown at them. You don’t have to divulge your individual one-only positions, but you can report to clients on a frequent basis and say what your strategy is and what your broad positions are.” said Mr Parker.
He added that a trend in the hedge fund industry away from black box management was “a healthy development”.
He explained: “If you invested in a hedge fund 10 years ago, you would not have been privy to the details of the investment process. Managers would say: ‘It’s fine, I’ve got a black box. Its a very secretive process; have faith in me.’ This stance is not fine for generating long-term confidence in the industry and it is not fine when things go wrong.”
Mr Parker observed that institutional investors were demanding increasing rates of transparency in addition to good risk management systems before they were prepared to invest in hedge funds.
He said: “[Potential investors] want to see very demonstrable and safe value-added. The winners will be the managers who, first, have a demonstrable track record, second, can offer very good risk management systems, including regulatory risk and third, can show good resources and stability of resources. What investors won’t want are the three guys who set up today and are perhaps gone tomorrow.”
Mr Parker pointed to frustration among managers at the slow take-up of hedge funds by institutional investors. To some extent, this was because many investors were still unclear about the issues of transparency and risk management. Also, they had not made up their minds on the merits of single strategies versus hedge funds of funds.
While funds of hedge funds remained the preferred route for first time institutional investors, Mr Parker highlighted a sub-trend to employ managers which ran a concentrated portfolio of hedge funds.
“Whereas traditionally a hedge fund of fund product might have 20-30 underlying strategies in it, nowadays there is a tendency for an investor to employ an advisor or a manager who can offer a very concentrated portfolio,” he explained.
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