Is too much transparency bad for your health?

Mon Nov 5, 2012

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Once an investor has been given the transparency they desire, are they then liable if and when something should go wrong?


By Niki Natarajan

Institutional investors pushed and pushed and pushed for it. And now for the most part they have it. Transparency it would seem is more important than performance to some. Institutional investors of course deny this as they continue to complain that hedge fund returns are just not what they used to be.

And in part it is these pretenders that are to blame; those that eschewed hedge funds during the dark times of information opacity where the returns were abundant. After all if you put everything on show then there is no mystery. Without mystery the opportunities for dramatic arbitrage diminish.

But to be fair, another part of the blame has to go to the evolution of information technology and the speed of its delivery. With 4G mobile speeds taking root, the issue is no longer about getting the information. It is about knowing which information is important, when and why.

The Soros generation had the information edge when they knew influential people at the central banks. Today's trader has live news and information feeds anytime, anyplace, anywhere - as said in the old Martini song from the advert popular in the 1980s that symbolises the wealth, glamour and decadence of that decade.

Incidentally, or perhaps not so, this was also the era that in 1984 saw the Apple Macintosh first introduced and Mark Zuckerberg, founder and CEO of Facebook, born.

Today, if intra-minute traders like Greg Coffey drop one of their multiple phones in the bath mid-trade, or lose reception in a lift or a plane, then the 'decisive moment' - and the millions of dollars that go with it - can be lost in an instant.

Mix into this technology two measures of instant media distribution such as Twitter then information is no longer the secret ingredient to the performance cocktail.

Some believe that those hedge funds that rely on information as their sole edge are struggling as the ease at which it is now available accelerates. Add to that investor demands for daily positions level transparency and very little is left to the imagination.

The question that most funds of funds are asking themselves as they watch the hedge fund investing industry transform in front of their eyes is what can institutional investors with limited resources really do with information?

In truth, most hedge fund investor apprentices are turning to managed account platforms and ex-consulting advisers to translate the data and process it.

Does this processing, aggregating and repackaging really add any value when done by people that might not actually know how to make the most of it? Has this need for transparency become an addiction with its own destructive downside? Like too many vodkas, is too much transparency bad for performance? And by asking for it, have investors inadvertently polluted their own performance pot? Panellists discussing this at the recent InvestHedge Forum believe not (pages 28-29).

The biggest unanswered question however, is that once an investor has been given the transparency they desire, are they then liable if and when something should go wrong? With everyone cutting fees at the discretionary level, who gets the blame when things go wrong?

But as Aomame in Haruki Murakami's 1Q84 says, "Where there is light, there must be shadow, where there is shadow there must be light. There is no shadow without light and no light without shadow... But where there is a shadow; there is always light on the other side."

So what is the light on transparency's dark side? Funds of funds are already seeing a return of the prodigal investor who is seeing the value of their skills as advisers to make money from all of this transparency and not just to process it.

With rapidly eroding future liabilities and an increasingly greying population that Ash Williams of Florida State talked of at the Forum, pension funds will return to reason.

And they will see that those intermediaries with a decade or two of 'proven' hedge fund investing experience such as that seen at the InvestHedge Awards (page 20) might actually be worth the price - even if it will most definitely be lower than in the past.