Pensions, Hedge Funds and Disclosure

According to Bloomberg reporter Jenny Strasburg ("Goldstein Asks SEC for Hedge-Fund Filing Exemption", October 24, 2006), Phillip Goldstein, "the investment manager who successfully blocked the U.S. Securities and Exchange Commission from requiring hedge funds to register, asked the agency to exempt him from stock disclosure rules." Ms. Strasburg reports his claim that mandated disclosure of holdings on Form 13-F would create economic harm as they constitute "valuable trade secrets." (It does not appear that his letter to the SEC has yet to be published. I will keep searching and post, if and once it is available.)

At the same time, Institutional Investor reports Paul Myners, chairman of the Ermitrage Group, as telling UK conference attendees that hedge funds provide protection against otherwise low returns. "Myners is pressing pension plans to pump up their allocation to 10 times the current level, to 30%."

Stateside, a new study by the Bank of New York and Casey, Quirk & Associates predicts a trend upwards in hedge fund investments by pension funds. Entitled "Institutional Demand for Hedge Funds 2: A Global Perspective," the authors predict that retirement plans around the world will triple their current hedge fund holdings to over one trillion dollars.

If Mr. Goldstein is successful in preserving confidentiality on behalf of his investors, more power to him. However, as a pension fiduciary, prudence would be difficult to justify in the absence of "sufficient and necessary" disclosure. (U.S. Code Title 29, Chapter 18 mandates "the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.")

While reasonable people can disagree about what constitutes "necessary and sufficient" information, certain questions come to mind with respect to hedge fund disclosure. (This is far from an exhaustive list.)

1. Is the hedge fund deviating from the stated strategy? If so, how does that affect asset allocation decisions for the pension fund investor?

2. How do holdings of the hedge fund change over time? What is the impact on transaction costs and, by extension, reported performance?

3. Do hedge fund holdings pose any problem for a pension fund with respect to liquidity?

4. Are the hedge fund's particular holdings difficult to value?

5. In the case of Form 13F, reported information reflects holdings of at least $100,000, a non-trivial amount by most accounts. If a hedge fund holds a large stake in a particular company, how is that likely to affect company policies and, by extension, how shares perform? (See the September 2006 issue of Chief Executive for an interesting article entitled "Do Hedge Fund Activists Have You in Their Sights?")

The list is long but the takeaway is simple. If investors plunk down millions of dollars, they should know enough to make an informed decision. posted by Susan Mangiero at 10/27/2006 12:10:00 AM