Business Reporters Get Edge in Hedge Fund Coverage

By Curt Hazlett
November 15, 2004 12:58 PM

When Bill Deener set out to write a story about Texas hedge funds in July, he found it pretty tough work.

Secretive and scarcely regulated, the funds aren't required to disclose their performance histories or strategies, and their managers are notoriously closed-mouthed. "I think I was able to get one hedge fund manager to speak with me, and I must've called 20 or so," says Deener, who covers the stock market for the Dallas Morning News.

Deener's reporting turned up the fact that the Dallas area has more than 125 hedge funds. But no one -- not even the Securities and Exchange Commission -- knows exactly how many such funds are operating in the United States. That's how little reporting is required of them, despite the fact that the industry's assets have swollen to an estimated $866 billion. Nearly $17 billion flowed in during the third quarter alone, according to industry estimates.

The funds' aggressive approach to investing, which can include short selling and options to increase leverage, have grown popular with high-income investors by offering high returns. The funds needn't register if their investors -- usually limited to 100 -- have net worth of at least $1 million each or if their household income has topped $300,000 for the past two years.

The lack of oversight has made hedge funds exceptionally hard to cover. "I don't do that many stories on them because it's so difficult to get the performance numbers and to find out exactly what their investment strategies are," says Deener, a 25-year veteran of the Morning News. When data can be found, he says, "I don't trust it. There's no transparency, and I don't have any confidence in their numbers."

But change appears to be coming to this hush-hush world. After years of sometimes bitter debate and opposition from the hedge-fund industry, the SEC voted Oct. 26 to require hedge fund advisers to register under the Investment Advisers Act of 1940 and to provide basic information about who they are and whether they've ever been disciplined.

For the first time, advisers and their records will be subject to examination by the agency, and they will be required to disclose how they voted their clients' proxies -- an important step in making them more transparent, according to proponents of the change.

The vote should give business reporters an invaluable tool. As it stands now, reporters writing about hedge funds have few resources, notes Daniel Burnside, a lecturer in finance at the University of Rochester's Simon Graduate School of Business. "If they don't want to tell you anything, there's not much you can do," notes Burnside, who also is vice president of quantitative strategies for the investment advisory firm of Clover Capital Management in Rochester. "But this rule certainly will change that. There clearly will be a lot more transparency."

Exactly how reporting will change "is an interesting question that I posed just recently to one of the (hedge fund) consultants," says Adam Shell, who covers investing from the New York bureau of USA Today. "All of the funds will have to file with the SEC, and you'll finally see all the names of the funds and who their managers are." 

Shell says there now are four general kinds of hedge fund coverage. The first, he says, occurs when scandal erupts, and that's far from rare; the SEC says investors have lost more than $1 billion in the past five years in 46 hedge fund frauds. The second comes when letters to investors are leaked, as happened in early October when billionaire investor George Soros informed clients that he was granting his two sons more management control of his $12 billion fund firm. The third is rooted in consulting-firm statistics such as the Van Hedge Fund indices which, while useful, aren't audited. Finally, there are profiles and features that end up throwing light on a fund's operations. 

"As time goes on we'll get a better sense of how the changes will affect the transparency of the funds," says Shell, "but right now it's all anecdotal."

The change won't happen soon: The SEC's new rules aren't effective until Feb. 1, 2006. "That's a long time away," notes Burnside, the University of Rochester professor. "When they set something that far away, one thing they're thinking is that it'll take people time to comply." The SEC may also be serving notice that "we're actually going to do this" and that it is awaiting reactions that could change the outcome, he says. 

In Dallas, Deener looks forward to the new rules. While he notes that the high-income requirements limit the number of readers with a personal stake in hedge funds, "I'm really interested in them. But it's just incredibly difficult to get any information, a real pain in the neck. I think this'll be very helpful to me in doing my job."

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