| Hedge funds responsive to investor's worries |
|
|
| 20/03/2005 | |
|
Hedge funds have diminished by half their leverage effect since a peak reached toward the end of 1997. Careful to warn about the difficulty to assess a poorly transparent industry that has reached a trillion dollars in 2004, investigators from the Bank for International Settlements (BIS) say that hedge funds have used an average leverage of 4.9 between 1996 and 2004. This leverage effect, which is estimated on the basis of the borrowings of hedge funds, has increased to 10 in 1997 and 1998, and then gradually decreased until reaching an average of 3 today. Pointing toward the interest of regulators in the US and Europe for this industry, the French regulator has set a maximum leverage effect of 4 in its new regulation on French-based hedge funds. The Autorité des Marchés Financiers (AMF) justified its decision saying that most hedge funds did not use a leverage superior to 4. Estimated average leverage effet, 1997-2004  Source: HFR, BIS calculations. Better reporting In line with this gradual reduction in the risks taken by hedge fund managers, transparency, another major related concern for investors, seems to be taking on more importance in the mindset of hedge fund managers. Albeit there is still much job to be done before investors can have a clearer picture of hedge fund returns and risks, a study by the consultancy Edhec-Risk shows that the opening of the industry to a larger investor base is leading hedge funds to become more transparent. A majority of the 98 investors and hedge fund managers surveyed says that regular risk measures such as volatility are not enough for assessing hedge fund risks and returns. According to them, measures such as the maximal drawdown and the value at risk (VaR), which are better adapted to the risks generated by hedge funds, should also be included in the report published by hedge fund. Current development may provide them with some relief. While only 20% of the fund of hedge fund managers provided their investors a VaR estimation in 2003, close to half of the managers now consider that this measure should be communicated to investors on a regular basis. The same is true for the risk-adjusted return measure. In its 2003 study, the Edhec observed that only 4% of the fund of hedge funds managers thought the Omega ratio, which is better than the Sharpe ratio for hedge fund assessment, was important. They were 57% to believe so in 2004. Julien Laplante |
|
© Copyright 2008 bfinance. This document is for your personal non-commercial use. Any further copying, reproduction, distribution is strictly prohibited. To obtain permission please contact This e-mail address is being protected from spam bots, you need JavaScript enabled to view it