Wednesday, March 10, 2010

Walking the talk on transparency

Why is a guy like Steven A. Cohen, who didn't used to even play golf with investors, sitting for a cover story in Bloomberg Markets magazine? Why is he inviting reporters into his firm right after SAC Capital 's name was linked to insider trading and the collapse of Galleon? Because he's smart. That's why. He understands that the rules have changed and that transparency, not performance, is now the name of the game. (And he's getting good counsel from his PR firm.)

SEI's The Era of the Investor: New Rules of Institutional Hedge Fund Investing study found that institutional investors said "transparency" was the most important challenge they faced in hedge fund investing. "Performance" was third. Similarly, according to Prequin's Global Hedge Fund Investor Review, "understandable/transparent strategy" was the most important consideration for institutions when choosing a hedge fund manager.

These days, according to an exec at a family office quoted in the Bloomberg Magazine story, "nobody will invest in an operation that is very clandestine...Even the most crass and abrasive managers are more investor-friendly now."

Engaging with media is an important part of walking the talk on transparency and savvy managers understand this. Furthermore, after the average hedge fund lost nearly 30% in 2008 and the Madoff fraud, most hedge funds need to do more than just ramp up the investor relations and provide more detail in their marketing materials.

Working properly with media can provide third party validation of how a fund thinks, works and generates returns. When this information reinforces what the fund is telling investors and prospects, it makes a difference when they decide to whom and how much to allocate.

In the Bloomberg Markets Magazine story, for example, we get insight into the following important aspects of SAC:
  • SAC's investment process (and how the fund has ended all non-equities trading)
  • The fund's risk-mitigating strategies at work during the credit crash
  • SAC's compliance department
  • How the firm is structured and how the firm runs itself as a collection of 100 small funds
  • How individual managers are held accountable for performance
The story also airs some dirty laundry, like Mr. Cohen's ongoing legal battle with his former wife, but that is anecdotal, in context of what we learn about the inner workings of SAC.

My criticism of the story -- and this extends to the decisions made by the reporters as well as to how SAC managed the boundaries of the story -- is that it details Mr. Cohen's art collection and has a photo of his mansion in Connecticut. It would better serve the interests of the firm had the focus of the story been all business (lose the list of Cohen's charitable contributions while you're at it) and included more commentary from other SAC investors (the story only quotes one).

To get an idea of what hedge funds should aspire to, when it comes to media, read the excellent profile of Bridgewater Associates in Fortune last year. It is noteworthy for two reasons. First, it avoids wasting ink on the fluff that too often permeates reporting about the hedge fund industry. More important, it articulates why investors choose to do business with Bridgewater.

This explanation of the "demand side of the hedge fund equation" is precisely what is lacking in media coverage of the industry and the opportunity for hedge funds to use media to demonstrate the value they provide clients, in their own words, is priceless.

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