Hedge fund disclosure - wide behavior but biased?

Hedge funds are supposed to be a secretive group, but a review of their newsletters and disclosure information suggests that there is a wealth of information provided to investors. Unfortunately, the type of information provided is highly variable and may be self-serving. While there are best practice standards set by the Managed Funds Association (MFA),  there is no general or minimum standard of what will be reported. The wide information on hedge fund disclosure behavior and their practices at providing the details is presented in a provocative paper called "Hedge Fund Voluntary Disclosure".

This is an important piece of research and needs to be read carefully especially in light the possibility for more disclosure requirements. On the positive side, hedge funds are not as opaque as thought and there is a growing amount of information that is provided to investors. This is an area of competition among hedge funds and shows that managers want to compete for investors through providing more information. Nevertheless, the authors find some interesting patterns in the data which suggest agency problems and self-serving behavior. Hedge fund use the information provided as a form "advertising" through elected giving up the good information and avoiding the bad information.

The authors find that better managers provide more information on their performance but less about what is going on in the portfolio. If a hedge fund has proprietary strategies and positions that are working, it does not give up this information easily. Riskier managers seem to provide less information on their risk. Their behavior is consistently self-serving. The high volatility managers do not highlight their volatility. Good funds seems to attribute their performance to skill and bad performing managers seem to believe that their perform is related to external factors. The markets are not behaving.  The authors reviewed thousands of newsletter to generate their statistical conclusions. This seems obvious, but it does suggest that the variance in information is based on selected behavior by the managers. There are agency problems with disclosure.

The disclosure of information is evolving quickly. Years ago little information was provided except for performance and some statistics. Now, a wealth of information is provided but it can vary by manager. Managers do not provide information that put them in a bad light. Like any detective, the investor who is doing due diligence has to look at the information provide but also for the information that is not provided. What is missing can be as important as what is told.