One on One: "Those that are in a position of making allocations into hedge funds … certainly have the right to know what’s going on"

With hedge fund investing now more popular than ever among both institutional and individual investors, intermediaries are becoming a significant catalyst in the battle to increase public disclosure by hedge funds.

Consultants that link investors with money managers and construct hedge fund portfolios, for example, are encouraging hedge funds to provide more-detailed information on investment strategies, risk management and portfolio holdings.

Virginia Reynolds Parker, president of Parker Global Strategies LLC in Stamford, Conn., has taken up that role and become an advocate for greater hedge fund transparency.

An industry hot button since the near-collapse and ultimate $3.6 billion industry bailout of Long-Term Capital Management two years ago, transparency, nonetheless, is still a fuzzy concept.

It has a broad range of definitions in a subculture of virtually unregulated investment products.

While there is a justifiable reluctance – not to mention legal restrictions – to simply throwing open the doors of a portfolio for public viewing, Ms. Parker insists that a middle ground exists. It’s a place where both investors and money managers can meet with satisfaction, she says.

In many respects, Ms. Parker is a voice of clarity in a wilderness of confusion over how hedge funds can best communicate with investors.

Steve Philp, who a few years ago oversaw the introduction of alternative investments at the Royal Bank of Canada in Toronto, hired Parker Global Strategies to help set up a fund of funds (a portfolio of several funds with different investment strategies).

She also helped the bank set up a managed-futures portfolio that is now offered to wealthy bank customers.

“In addition to the investment risks, we [as a bank] have a franchise risk here because we don’t want our name in the paper for the wrong reasons,” says Mr. Philp.

“I think [Ms. Parker’s] strength is her ability to define risk and then put in place the processes to manage risk,” he says.

Ms. Parker, who began her career in 1981 managing portfolios for the Reynolds family office, believes that transparency needs to be coupled with due diligence, and she believes that intermediaries need to provide risk analysis.

Q How much resistance is there from the hedge fund industry to providing greater transparency?

A There is resistance, but what we have seen is that, as more of the traditional asset management firms have started to offer hedge fund products, they seem very open to providing that type of transparency, because they have been in the business of providing transparency.

Q How much transparency should investors expect?

A We’re not suggesting that every investor in a hedge fund should necessarily have 100% transparency, but what we do believe is that those that are in a position of making allocations into hedge funds for investors that they represent certainly have the right to know what’s going on in the portfolio.

Q Can an investor be overwhelmed with complex and detailed information?

A Not for sophisticated investors who know what to do with the information.

What I’m suggesting for those investors who are not equipped to handle the information [is that] the prime brokers are in an excellent position to provide the investors with a daily or weekly report that is distilled down to a page or two of pertinent information.

It’s true that a huge data dump is going to provide very little to an investor who’s not equipped to handle the information, but many of those investors have representatives who can help them understand the information.

Q What about due diligence? Are investors doing enough to understand hedge fund investing?

A I think that we see investors perform a wide range of due diligence, from those investors who go into a hedge fund because they know other people who are investors in the hedge fund, and there is very little due diligence performed, to those who are very, very careful about the due diligence they are performing.

They are trying to get information independently verified, and they are talking to not only current investors but also investors [who] have redeemed within the past year or two.

[Also, they are] speaking to the prime brokers and the auditors and the administrators to try and uncover any problems that may not be readily apparent.

Q How much have technology and the Internet changed the hedge fund industry?

A The Internet has certainly offered an excellent medium for the passing along of information.

For those hedge fund managers who choose [to], many of them are making information available about their portfolios and about their strategies on secured websites.

Q How is the trend toward institutional investors moving into alternative investments changing the business?

A We certainly do see a lot of institutions investing and increasing their investments in this area.

We also see that many of these institutions put a higher level of demand on the hedge fund managers as far as the type of information that they require. We have even seen institutional investors requiring hedge fund managers to complete [requests for proposals].

Q Are the managers receptive?

A The hedge fund managers are receptive so long as they are continuing to accept new assets under management.

If the fund is closed to new investors, it is unlikely that the manager is going to be completing requests for proposals.

Q But the manager may go to some extremes to get the institutional money, right?

A One of the things that many hedge fund managers find potentially attractive about the institutional investor is that those assets tend to be stickier.

One of the criticisms of the high-net-worth [individual investor] market is that the money can be hot.

Q What’s the likelihood that hedge funds will start to see some regulatory oversight?

A There has certainly been some discussion about increasing the regulations on hedge funds.

I think that what the industry has tried to do is say, “Let us regulate ourselves, much like the NASD.”

Q Aside from regulatory pressures, what challenges does the hedge fund industry face?

A The biggest concern is there is a lot of institutional money coming in, and I think that capacity could start to be a real issue over the next couple of years if the amount of these investments continues.

Because what happens when capacity is short is that investors then are forced to lower their standards.

They will be investing with managers that have very short track records and managers whose track records aren’t as strong as some of the others that are out there.

What will likely happen is that the strong managers will end up closing first, and the investors are left with what remains.

SNAP SHOT

Virginia Reynolds Parker, 42, founder and president of Parker Global Strategies LLC in Stamford, Conn.

Assets under management: $550 million in alternative-investment portfolios, primarily for institutional investors

Career: 1995, founded Parker Global Strategies; 1988-95, helped build from startup Ferrell Capital Management, a global trading and risk management firm; 1984-88, chief investment officer of the Reynolds family office; 1981-84, managed equity and fixed-income investments for the Reynolds family office

Education: 1980, bachelor’s degree in economics and political science from Duke University in Durham, N.C.