The Fund of Hedge Fund Reporting Puzzle
The development of alternative investment has not yet been accompanied by a genuine consideration of the specific characteristics of the risks and returns of hedge funds with regard to the provision of information to investors.
Professor of finance and director of research and development, EDHEC Business School
Research Engineer, EDHEC Risk and Asset Management Research Centre
This inadequacy came to light in a study published by Edhec in 2003, a study that showed that a very large majority of European hedge fund managers were satisfied with a reporting method designed for investment in traditional asset classes. This method proposes a mean variance-structure that is inappropriate for the risk and return profiles of alternative investment and does not inform investors of extreme risk and risk factors affecting the different returns of the hedge fund strategies in which the funds of funds are invested. To address this issue, in 2004, Edhec launched, an international consultation process for the implementation of a new framework for funds of hedge funds reporting. This consultation process was based on a series of recommendations proposed by Edhec with regard to the academic state-of-the-art on risk measurement in the alternative universe. The findings of the survey, which brought together the opinions of 98 institutional investors and fund managers, allow a consensus to be established on the information required for the implementation of a relevant reporting method in the field of alternative investment. Despite somewhat conflicting goals, investors and fund managers, except for slight discrepancies, agree on what makes information relevant and on what information future reports should contain.
The Fund of Hedge Fund Reporting Puzzle...
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