Major discrepancies in hedge fund performance reporting

The Chartered Financial Analyst Institute (CFA), one of the most important organizations in the investment industry, is expected to announce performance presentation standards for the hedge fund industry sometime later this year. Currently, they are formulating their recommendations and we applaud their efforts.

Ideally, these standards should benefit hedge fund managers by leveling the playing field on which they compete, as well as investors, by providing consistent information that will enhance their investment decision-making process. It is extremely important that the CFA Institute achieves both objectives in order to have broad adoption across the industry. Now is the time for the hedge fund industry to speak up.

Agecroft Partners feels compelled to share our updated views on what we expressed earlier this year in an educational video hosted at the CFA Institute.

Today, there is no consistency across the hedge fund industry in how net performance is calculated and presented. There is some consistency in performance and risk disclosures, but they provide very little clarity. Most disclosures offer worst-case scenarios as hedge fund law firms seek to limit their client's liability. This does help keep less sophisticated investors away

Unfortunately, this type of disclosure provides limited information to be used by sophisticated investors to measure risk-adjusted performance across managers

The most important issue that needs to be addressed is standardizing how to calculate and present a hedge fund's net performance. One might suggest simply subtracting all fees and expenses from gross returns. Unfortunately, most things are not as simple as they first appear. Here are four scenarios that illustrate the inconsistent ways various fund managers calculate performance:

1. A hedge fund is launched with non-fee-paying partner capital. After two years of managing int......................

To view our full article please login

This article was published in Opalesque's New Managers a top-down monthly analysis, news and research publication on the global emerging manager space.