Who is Responsible for Hedge Fund Secrecy: Governments or Managers?

It’s easy to assume that hedge funds are totally obsessed with secrecy.  In fact, one might be excused for believing that the lack of regulation and resulting lack of transparency is what makes a hedge fund a hedge fund. In its report on the upcoming Congressional hearing involving five of the highest paid hedge fund managers, the magazine “Congressional Quarterly Weekly” (not a typo) describes secrecy as:

…a prerogative that fund managers jealously protect in order to keep competing funds from appropriating their business strategies.

But do hedge fund managers really rely that much on secrecy to produce their returns (as Bloomberg’s Matthew Lynn suggested in this column last year)?  Wouldn’t all managers - including ones of the long-only persuasion - also want to keep their investment ideas a secret?  NYU’s Stephen Brown questioned CQ Weekly’s assumption, telling the publication:

…(hedge fund managers) have only themselves to blame — so many of these guys think, incorrectly, that the lack of transparency is part of their business model…

So who is responsible for the “secret” nature of the hedge fund industry, government or managers?

Some hedge fund managers want less secrecy - a lot less. Phil Goldstein, for one, wants to be able to talk about his funds in public. Regular readers will remember Goldstein as the hedge fund crusader who argues that he has a First Amendment right to talk about his funds in public . This article in FINalternatives quotes Goldstein and others on the topic of hedge funds and the media from a recent conference in New York.

Reports FINalternatives:

Clearly they weren’t [a great systematic risk] in this recent situation but it is the lack of understanding, which is fed because of the lack of information,” said [hedge fund PR specialist Mitch] Ackles. “And the lack of information is caused by the fear people have of communicating; they don’t want to be perceived as soliciting in any capacity. If hedge funds are able to communicate and open up the kimono a little bit, people might have a greater understanding and blame them a little less.

Goldstein wants to allow anyone to view his website - not just accredited investors. But with a direct line of communication between hedge funds and the public severed by SEC regulations, the Internet still plays a critical role.  Said Goldstein:

From a practical sense, it’s ridiculous because an accredited investor, according to the SEC’s regime, can go on the Web site, get information, and then disseminate to the entire world on the Internet. How do you think they get all of these stories in the Journal? It’s the information age and you can’t keep it under wraps.” (…our, self-serving, emphasis)

As technophiles are always quick to proclaim “Information wants to be free“.  But some information isn’t liberated as easily as others - just ask CSX who was blind-sided by hedge funds secretly amassing economic interests in the firm earlier this year or ask hedge funds who were caught off-guard themselves by Porsche’s similar “gotcha” tactics at VW last month.

The bottom line is that “secrecy” can apparently mean very different things to different constituencies.  Some managers want it, some don’t.  Some governments demand it, some don’t.  And some companies fall victim to it, while some actually exploit it.

Oh, the name of the conference featuring Goldstein and Ackles?  FINalternatives doesn’t say.  It’s a secret…

Related posts:

• A comment on the (latest) Goldstein case
• Phil Goldstein Update

Comments

[Kinabalu:]

"Some hedge fund managers want less secrecy - a lot less. Phil Goldstein, for one, wants to be able to talk about his funds in public"

What a shibboleth! If he wants to talk about his fund he should do an IPO. Then he will have disclosed the bad with the good. What he really wants is to talk about the good only.

The theory behind being allowed to talk freely to accredited investors is that they will be sophisticated enough to see through the rosy pronouncements and ask the hard questions. In fact, the theory falls down because the main criteria to be an accredited investor is that you have a lot of money. While there are always exceptions, most accredited investors made their money in some specific line of work other than investing, and are not, in fact, sophisticated investors.

Accredited investors are, however, easy marks for sophisticated hedge fund marketers, which is a skill that is much more common than sophisticated hedge fund managers.

2008 Nov 05 06:24 PM

[notsosmart:]

the wealthy chasing for more wealth.let them all collapsewhat would happen? i keep asking "what good are they?" no one answers. waiting for the pardon list.mission accomplished has to take care of his cronies.

2008 Nov 06 11:49 AM

[HedgeFundGuy:]

Hedge Funds' secrecy has for years made it difficult for job-hunters to get hedge funds jobs by any method other than job boards and recruiters. Their secrecy made direct contact difficult. Now job seekers like me are in luck because you can get really cheap, comprehensive lists of hedge funds on a state-by-state basis at http//HedgeFundJobList.com

2008 Nov 08 10:54 AM

[HedgeFundGuy:]

www.HedgeFundJobList.c...

2008 Nov 08 10:57 AM