Transparency is crucial as hedge funds fight for assets, according to PwC report

Hedge fund managers must significantly increase levels of transparency into their governance and operational structures if they are to win institutional investors’ favour for allocation of assets over traditional asset management industry providers, according to a new report from PwC.

The PwC report ‘Hedge fund trust & transparency: From black box to open book’, is compiled from interviews with funds, consultants, managers, administrators, regulators and industry associations. It reveals that as hedge funds become more mainstream, institutional investors are demanding a higher level of transparency into their governance and operational structures, in order to rebuild and retain trust in the managers.

The report points out this increased focus on transparency will be easier for larger managers to provide due to the robust infrastructures many of them already have in place. For new managers, commentators in the report have suggested this could raise the barrier to entry and have predicted European managers will now need $250m of assets to be viable, up from $100m - $150m a few years ago.

Olwyn Alexander, partner, PwC Ireland, said:

“Winning investors’ trust is now top of the agenda as the influence of funds-of-funds has waned post crisis, and other types of institutional investors are now playing a more important role. Much of the money flowing back into the sector is being allocated to the managers with robust infrastructure and good levels of transparency. Hedge funds must recognise the opportunity they have to increase assets through regaining investors’ trust.”

The report reveals transparency is the key to rebuilding investor trust. In order to do this, hedge fund managers will have to relinquish much of their influence over funds, make fund boards more effective and autonomous, and ensure that administrators and other service providers prioritise investors’ interests. Managers will also have to strengthen their own governance and operations, and demonstrate they have done so by providing greater degrees of information and proving there are appropriate controls across the hedge fund value chain.

Karen Sharpe, UK hedge fund third party assurance leader at PwC, said:

“Hedge funds have moved out from their opaque environment of 10 to 15 years ago, but more still needs to be done to meet investors’ current high trust and transparency standards. Our analysis suggests conflicts of interest and operational weakness remain in areas of the hedge fund value chain and these must be addressed for the sector to fulfil its growth potential. Managers of all sizes must do everything possible to provide the governance and controls investors and regulators want to succeed in this new, highly regulated world.”

Olwyn Alexander, partner, PwC Ireland, added:

“In five years’ time, the hedge fund industry as we know it will be almost unrecognisable. Given the tsunami of regulation managers are facing, together with investors’ increasing demands, we are going to see a fundamental change in the way managers operate, the way funds are structured and the way service providers along the value chain operate their businesses.

“In our view, going forward investors will demand that European funds should have independent, empowered and capable boards, served by independent administrators or in house valuation functions. These can provide full transparency into the valuation process and the independent calculation of fund net asset values (NAVs).”