Low transparency of hedge funds is often viewed as a key risk factor of alternative investments, while the term transparency
is referred to the fund's asset allocations. Such a standpoint ignores the fact that the degree of investment risks depends on the way of structuring
assets in the portfolio, rather than on assets themselves.
Due Diligence On Hedge Funds And Transparency Issues
Fund managers may dynamically rebalance assets, use derivatives for hedging, apply complicated multi strategies and so on. A good trader can make money virtually on any asset classes by entering into complex derivatives. As such, knowing the asset allocation breakdown at any time, delivers the most worthless information. The really important transparency aspects are as follows:
- full transparency of fund risk management processes
- full transparency of employed trading strategies and a fair understanding of how a fund makes money
Transparency of fund risk management and trading strategies matter a lot, while the worthiness of knowing asset allocation is highly overrated.
Instead of delving into a generic and mostly useless analysis of fund’s underlying assets, our due diligence process concentrates on managers' trading strategies and applied risk management methods.
Asset transparency should not be considered as a sign of a safe haven or viewed as a confidence factor.