Over 20 per cent of hedge funds frequently misrepresent important information about funds and their performance to investors, according to a study by NYU Stern Finance Professor Stephen Brown.
With co-authors William Goetzmann from the Yale School of Management, Bing Liang from the University of Massachusetts at Amherst and Christopher Schwarz from the University of California at Irvine, Brown examined some 444 hedge fund due diligence reports, supplied by a major hedge fund due diligence firm hired on behalf of investors.
And according to their findings, 21 per cent of hedge funds frequently misrepresent prior legal and regulatory problems, while 28 per cent provided incorrect or unverifiable representations about assets under management, performance and other topics. Nine percent of the sample said they had no legal or regulatory problems when in fact they did, and six per cent disclosed some problems, but not others.
Because the fiduciary responsibility to assess the integrity of hedge funds currently rests with the funds themselves (versus with a regulatory body such as the Securities and Exchange Commission), this report may affect the investment strategy of institutional and individual investors and influence regulatory governance in the hedge fund industry.
“Operational transparency is essential to financial intermediation,” says Brown. “In the past, the industry has been opposed to transparency, and this study shows that some funds are unwilling to be forthcoming even to their own investors and potential investors. It is this lack of information, this lack of transparency at an industry level, that is of greatest concern and will come back to haunt the industry.”