Preventing and detecting hedge fund failure risk through partial transparency

ISSN： 1357-0927

Source： Derivatives Use, Trading Regulation, Vol.12, Iss.4, 2007-02, pp. : 330-341

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Abstract

Hedge fund managers often do not offer transparency to their investors. To do so, they say, would reveal their trading strategies and reduce their investment profits, as other traders use the knowledge of their positions to compete for the same trades. However, most investors do not need complete transparency, which reveals trading positions on a frequent basis. Complete transparency, revealing the specific securities in the portfolio, can be damaging to the hedge fund manager, and confusing to the investor. However, the investor can benefit from partial transparency. A third-party service that aggregates portfolio information can be invaluable to investors in their search for stronger risk management and fraud prevention techniques. However, most commercially available services focus on market risk and do not provide the data necessary to detect operational risk failures. Through the use of three case studies: Bayou, Lancer and Wood River, we demonstrate a few simple tests to prevent and detect both market risk and operational risk by hedge fund managers.Derivatives Use, Trading & Regulation (2007) 12, 330-341. doi:10.1057/palgrave.dutr.1850049