Transparency In Hedge Fund Investing Is Critical For Investors - Due to some recent high profile fraud cases within the hedge fund industry, many investors are seeking greater transparency from their investment managers. While many managers protect their proprietary trading programs, there is one sure fire way to address this issue. |
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You are here: DIME Home > Investing > Transparency In Hedge Fund Investing Is Critical For Investors
Due to some recent high profile fraud cases within the hedge fund industry, many investors are seeking greater transparency from their investment managers. While many managers protect their proprietary trading programs, there is one sure fire way to address this issue.
Author: Dwayne Strocen
Date: Jan 6, 2010 - 4:49:12 PM
Fund redemptions are nothing
new.
Every recession or bear market
sees investors redeeming their fund investments and moving to asset classes
which provide a greater degree of safety.
For most, this is the Government Treasury Bill also called the T-Bill.
While reasons for
redemptions are as varied as the investment selections themselves, it seems
that individual investors are uncertain of their understanding of what their
money has been invested in.
While
mutual funds are marketed to the investor with a lower knowledge of investment
products, the hedge fund has always been the investment choice for more
knowledgeable investors or the "Accredited Investor".
But now it seems even this group is calling
for the need of greater understanding from their investment managers.
The battle for returns which
out perform the index has resulted in many Portfolio Managers refusing to
disclose their trading program for fear others will duplicate their trading
style.
It is said by many managers that
it's this ability to observe unique characteristics in the market place that
differentiates their funds performance from the typical returns generated by
bottom quartile performing funds and fund managers.
Of course the unregulated hedge fund industry has perpetuated
this myth by trusting the Accredited Investor with an above average knowledge
of the market and his ability to select the correct investment for their
portfolio.
It seems the Accredited
Investors does not always posses greater knowledge than their more
un-sophisticated mutual fund brethren.
So that bears the question
of how to obtain this transparency to the satisfaction of the investing
public?
And the answer is the Managed
Account.
Managed Accounts are simply
individual accounts opened in the name of the investor.
These accounts are not pooled, yet they are
identically structured and managed by the hedge fund Portfolio Manager in the
same style as the pooled fund.
The
critical difference is the investors ability to see every trading transaction
performed in the account by the fund manager.
The popularity of the pooled
investment structure is that investors do not have to deposit large sums of
money to utilize the services of a professional Portfolio Manager.
Most successful professional Portfolio
Managers do not accept accounts less than US$10 million dollars.
The hedge fund and mutual
fund gained popularity by allowing smaller sums of money to be pooled with
other deposits from many other investors.
So while you can currently participate in a hedge fund investment for
$100,000 and a mutual fund for $50., a managed account may require a minimum
investment in excess of $1 million.
Not
so good for everybody.
But lets suppose you can
convince your hedge fund manager to accept your $100,000 what advantage do you
gain.
There are also some
disadvantages.
Or put another way, the
pooled investment structure provides some distinct advantages which originally
made them popular since the first hedge fund was created in 1949.
These funds should not be confused with the
investment account managed by your stock broker.
The professional Portfolio Manager will continue to exercise
complete trading autonomy and does not want your advice on how to manage the
assets in your account.
Advantages for remaining in
a hedge fund or mutual fund:
It is estimated that the hedge fund industry
managed $2.7 trillion dollars by the end of 2008.
The mutual fund industry manages $19 trillion investment
dollars.
So there is no question of the
popularity of the industry since that first fund in 1949.
If transparency is an issue
for you, you need to take a long, hard look and evaluate the pros and cons
wisely.
Take some time to speak with
your fund manager about a managed account, it just might be the alternative
you've been looking for.
Dwayne Strocen is a registered CTA and derivatives analyst assessing
market risk for institutional investors.
He also manages the Global Climate CTA Fund, which is focused on the
reduction of greenhouse gases and global warming.
Website:
http://www.genuineCTA.com
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