Hedge Funds: If We're Looking at AUM, Let's Also Look at LUM

As we learned from the WSJ last month, "assets under management" is not the most useful of metrics to use when judging the size of a hedge fund.

For example, bond fund Y2K said it had assets under management of $2 billion as recently as July. But after a tough summer, London-based parent Wharton Asset Management UK Ltd. said the fund actually had less than $100 million in investor capital, and that most of the rest had been borrowed.

If this is a problem, let me suggest a simple solution: that every fund reporting AUM should also report LUM, or liabilities under management. For a plain-vanilla long-only mutual fund, that should be easy: LUM will always be zero. But for funds with leverage, the combination of AUM and LUM should give a much clearer idea of exactly what kind of fund they're running than AUM does on its own, or even if the AUM figure is accompanied by some vague and ill-defined leverage ratio.

Comments

[Thomas Kirchner]

Ever heard of the concept of Net Asset Value?

2008 Jan 06 02:27 PM