Hedge funds provide poor stress-testing disclosure, says Iafe

Hedge funds offer poor stress-testing results and ‘greeks’ disclosure to third parties, according to a new survey by the International Association of Financial Engineers (Iafe).

Only 57% of hedge funds polled by Iafe’s Investor Risk Committee (IRC), in conjunction with New York-based consultancy Capital Market Risk Advisors, offered disclosure on stress-test results, compared with 72% of funds of funds. But funds of funds had a weaker performance on ‘greeks’ disclosure with only 44% offering such information compared with 57% of hedge funds. Greeks are used for measuring and creating hedging strategies.

The survey also found that the majority of investors and funds of funds believed position-level disclosure would only affect the performance of certain types of hedge fund strategies. But 32% of hedge funds believe such transparency would have a significant or material impact on hedge fund performance.

Mark Anson, chief information officer at Californian pension fund Calpers and member of the IRC’s steering committee, said a balance was needed regarding hedge fund disclosure. “Transparency is an issue for all investors,” Anson said. “However, there must be a balance between the disclosure of meaningful information to investors and the protection of a hedge fund manager’s proprietary investment knowledge.”

For example, investors place more emphasis on risk profile and stress-test results than on position-level transparency. But funds of funds placed an equal emphasis on these two areas of disclosure. The survey found that 80% of funds of funds and 13% of investors received position-level information. That said, a third of funds of funds and hedge funds said investors request more information than they are willing to provide.

Survey participants included institutional investors with $479 billion of assets under management, funds of funds with $36 billion under management and hedge funds with $109 billion under management.