Risk USA 2003: Schachter hits out at hedge fund disclosure

Barry Schachter, head of risk management at US hedge fund Sac Capital Advisors, believes quantitative hedge fund information disclosure to investors is relatively meaningless, and that they would be better served by disclosures about the risk management function at unregulated funds.

Speaking during the plenary session at Risk magazine’s ninth annual Risk USA conference in Boston today, Schachter said even position-level information is inadequate to serve investor needs, as the information is often irrelevant without the investor knowing the fund’s strategy. Schachter added that even if a hedge fund divulged both position-level data and its strategy – a highly unlikely situation as it would raise concerns that investors could reverse engineer the fund – it would still ignore certain other risk areas, such as modelling error, which present significant risks in statistical arbitrage funds, for example.

Hedge fund disclosure has attracted increased attention from both regulators and investors, with most hedge funds only prepared to offer low-level aggregate disclosure to investors. Schachter described the ongoing talks as “not a fevered discussion, more like a cold passed around from one family member and back again". But he described the use of tools such as value-at-risk, conditional VAR, stress test information, sensitivity analysis, liquidity, credit exposure and operational risk disclosure – including lost data – as largely meaningless. “Such measures aren’t really useful," said Schachter.

Instead, Schachter said risk management disclosure on the independence of a risk manager’s position, the authority of the risk manager, quality of the risk manager – including distribution of his/her resume – the involvement of traders and senior managers in the risk management process, the resources available to the risk management function and the nature of risk manager’s report should be offered to investors.

But he joked that he might "offer his resignation" if he were asked to convince Washington bureaucrats about the matter.