Hedge fund performance has been underwhelming. An influential professional organization has overhauled its reporting standards in order to bring more funds into the fold, but adoption would force portfolio managers to give up tactics to make returns look better.
The notoriously opaque hedge fund industry has never widely adopted any broad guidelines for calculating performance figures. Managers can overstate returns by selective reporting, observers say, and many are supportive of centralized, transparent rules.
It’s another example of the transformation the once-niche industry has made into a more institutional business, with pensions and endowment investors now limiting the big, concentrated bets funds used to be famous for taking as the bar continues to be raised for new launches.
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The CFA Institute released its 2020 Global Investment Performance Standards on Tuesday that will take effect on Jan. 1. The new standards are designed to appeal more to hedge funds and other alternative asset managers, and differ from existing guidelines, by allowing managers to report performance for individual funds without having to disclose firm-wide performance, said Karyn Vincent, head of global industry standards at the CFA Institute.
The current guidelines, which went into effect in 2010, were not widely adopted by hedge funds, Vincent said, and making the standards more flexible and appealing for more types of managers was a guiding factor in crafting the next iteration.
Funds have been able to overstate returns using tactics like giving net performance figures on assets held by the founder that aren’t charge fees, or only reporting performance in a closed-off fund for select investors instead of an overall performance figure, wrote Don Steinbrugge, who runs hedge fund consultancy Agecroft Partners, in a recent paper.
“Today, there is no consistency across the hedge fund industry in how net performance is calculated and presented. There is some consistency in performance and risk disclosures, but they provide very little clarity. Most disclosures offer worst-case scenarios as hedge fund law firms seek to limit their client’s liability,” the paper from Steinbrugge reads.
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Hedge funds have been less restricted in how they could market themselves since the JOBS Act passed in 2012, and industry observers say they have also been even more aggressive in selectively picking performance numbers.
“Hedge funds, after all, are salespeople, they want to raise assets and maintain assets,” said Jon Caplis, founder of PivotalPath, a service that provides performance data for hedge fund investors. While Caplis and others don’t believe managers often lie outright about performance, the lack of standard reporting means they can take measures to make returns look as good as possible.
“I believe there’s a significant problem with cherry-picking performance in the industry,” said Dev Kantesaria, founder of $450 million hedge fund Valley Forge Capital Management.
Big managers may offer increasingly popular “funds-of-one” for big investors along with their main fund that have different fee structures and investments. Steinbrugge says it should be clear to investors if performance is radically different between separate structures in the same strategy.
While many funds agree in principle that some type of standard for performance reporting is needed, Kantesaria said the hard part will be reaching an industry-wide agreement on how enforcement should be overseen. Some funds may prefer a regulator like the SEC take up the issue, not an organization like the CFA Institute.
“And in the end, if there is agreement on someone to run, you’ve got to get a lot of people who are pretty protective of their information to share it. It won’t be easy,” Kantesaria said.
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