Institutional investors may want access to more information about hedge funds and their managers, but they fear overregulation, an informal survey by Pensions & Investments shows.
"I understand why the SEC is looking at this (the hedge fund industry), but I just don't want them to overstep their bounds and hamper the industry," said Brian Glanz, investment officer for alternatives at the $3.6 billion Philadelphia Public Employees Retirement System. Mr. Glanz said he has met with 30 or so hedge fund managers in recent months, as the system prepares to perhaps make its first investment in the strategy.
Right now the hot-button hedge fund industry issues appear to be transparency and disclosure, which are linked, and whether hedge fund managers should be required to register with the Securities and Exchange Commission.
Institutional investors disagree over how much hedge fund managers must disclose in order to be transparent. Most want an accurate picture of the risk of their hedge fund investments, and how those investments relate to the overall portfolio risk of the pension fund or endowment.
Brian Sergeant, pension management analyst for the $300 million City Employees' Pension Fund in Gainesville, Fla., said he needs to know where, or if, the pension fund is overweighted or underweighted in any sectors or asset classes. He said requiring full transparency, or disclosure of individual positions, to independent third-party firms that have no trading desk and that can provide pension funds with aggregate risk information is a good idea. Gainesville may make its first allocation to hedge funds later this year, Mr. Sergeant said.
Some want to see for themselves what their hedge fund managers' holdings are, noted David Swensen, chief investment officer for the $10.5 billion Yale University endowment, New Haven, Conn., which has about $2.8 billion in absolute return strategies. At a recent hedge fund roundtable hosted by the SEC, Mr. Swensen said that seeing position-level returns lets the endowment know which positions contributed to performance.
But Mark W. Yusko, president and chief executive officer of UNC Management Co. Inc., which manages investments for the $1 billion University of North Carolina at Chapel Hill endowment fund, said requiring hedge fund managers to disclose positions is "a terrible idea."
"You don't require Coca-Cola to disclose its secret formula," he said. UNC-Chapel Hill has about 40% of its endowment assets in hedge funds.
Mark Anson is chief investment officer at the $131 billion California Public Employees' Retirement System, Sacramento, which has more than $555 million invested in hedge funds. At the SEC roundtable, he said forcing hedge fund managers to disclose positions to investors "may hurt the manager, which erodes investors' returns, and that does not help me." But, he said, there should be some basic minimum level of disclosure that all managers must adhere to, as opposed to the varying standards managers follow now.
The $32.5 billion Virginia Retirement System, Richmond, is in the final stages of hiring a consultant to help screen potential hedge fund investments. In an interview, Chief Investment Officer Nancy Everett said she thinks the current level of disclosure and reporting by hedge funds is adequate.
One tool the SEC may use to compel more disclosure and improve transparency is requiring hedge fund managers to register as investment advisers. Registration would allow the SEC a measure of oversight it does not currently enjoy, since most hedge fund managers are not registered with the commission, SEC Chairman William H. Donaldson said in testimony before the Senate Committee on Banking, Housing and Urban Affairs on April 10.
Some 1,800 hedge fund managers that use exchange-traded derivatives are registered with the U.S. Commodities Futures Trading Commission as commodity pool operators. The CFTC may expand its registration exemption policy, which could cut in half the number of managers registered, said Jane Kang Thorpe, director of the CFTC's Division of Clearing and Intermediary Oversight.
Patricia Gerrick, CIO of the $8.8 billion Indiana Public Employees' Retirement Fund, Indianapolis, said hedge fund managers should be required to register, but plan sponsors are ultimately responsible for doing their own due diligence. Indiana has not invested in hedge funds yet but is putting together a hedge fund investment policy.
Forcing managers to register could cause managers to move their business offshore and close their funds to U.S. investors, said Philadelphia's Mr. Glanz. That, he said, could place some of the best hedge fund managers out of reach of both U.S. regulation and U.S. investors.
That's a chance Robert Jones is willing to take. Mr. Jones is executive director of the $1.2 billion Oklahoma Firefighters' Pension & Retirement System, Oklahoma City, which has two hedge fund investments of $45 million each with individual hedge fund managers. One provides good transparency, but "I get absolutely nothing from the other manager unless I fly up to New York City, and even then I only get summary information," Mr. Jones said.
That lack of transparency has been "one of the biggest inhibitors to us getting more involved in hedge funds. It's just unacceptable to have a major percentage of your assets in a fund where you don't know where the money is. It borders on negligence, from my perspective," Mr. Jones said.
He said he understands that hedge fund managers fear disclosing their short positions, but said he doesn't necessarily need to see them. "I just want monthly information; I want assurances they're not buying cocaine in Colombia."