The Future of Hedge Fund Investing: A Regulatory and Structural Solution for a Fallen Industry

CHAPTER 9

Correct Risk Due Diligence

 

 

 

 

What has completely baffled me about the fund of funds industry is that it is always clamoring for increased transparency. It certainly is a very pertinent request, and it also makes for good newspaper headlines and aids in marketing for the fund of funds. But the question is, What does the fund of funds industry do with this transparency? It certainly does not have the qualified personnel to monitor the risk reports provided by the hedge funds. Most large and small hedge funds these days provide regular risk reports to their investors. Some funds even provide daily risk reporting through a website access. If the fund of funds industry was actually doing its job and monitoring these risk reports, then how could it let some of the largest hedge funds lose upwards of 40 percent in 2008? When hedge funds that market themselves as low volatility safe funds can lose as much as 30 percent in a single month, as quite a few relative value funds did in October 2008, then clearly risk limits must have been breached.

These risks should have been quite evident in the risk reports provided to the fund of funds industry. Did the funds of funds understand these risk reports? Did they bother to even look at them and ask the right questions? It was their fiduciary duty to do so, as the investors entrusted them with their capital and paid them fees to perform those tasks. The bottom line is that all the transparency in the world will not mean much if the ...