It is the lack of regulation, not information…

It’s eleven days into 2010 and already the stories about the evils of the hedge fund industry are hitting the news sites. I have one thing to say to all the reporters who continue to write this stuff – Thank you. Without your stories, I’m not sure that I’d have a lot to write about.

The most recent item comes from the good people at Reuters Breaking Views, titled Hedge Fund Tell Part of Results. The story complains that hedge fund indices are riddled with bad information because the data are mostly survivor biased. This means that because funds are not required to report returns to the databases the indices are based on, the results are flawed because the data come only from funds that have done well. And while I couldn’t agree more (that is not a typo) with the writer, I have been saying for years that one thing the SEC and FINRA could do to make things better for investors and managers is to require performance reporting similar to rules that govern the way mutual funds report performance. (Read the past to this blog or any of my books to see that I am not blowing smoke.)

The issue is that people still don’t seem to understand that there is more to investing than looking at past performance as a way of predicting future results. Performance measurement, while important, is just one piece of a very large puzzle. The problem with hedge fund indices is that they are self serving. They don’t add any real value, because the quality of the data cannot be assured. This is the real problem behind those so-called hedge-fund replication exchange traded funds that the major news outlets have been writing about for the last few months. How do you create an investment based on information that you can’t be sure is accurate? I don’t know, but I can say this much: I will not be buying hedge-fund replication products or investing in any hedge fund index products until I know the data used to create them are correct.

That being said, there will be many who do buy these products and those who continue to use hedge fund databases as tools to make investment decisions. I am not one of them. Whenever someone asks me about a manager and how they did last month, last quarter or last year, I reply:

“Why do you care? You didn’t have any money with them. You should ask how are they going to do going forward and how do they decide on a successful investment strategy. Get an answer that makes sense and use that as a way of determining if the manager is worthy of your money. ’’

Understanding the value of communicating with investors is just one of the topics we will be talking about on the January 19 HEDGEAnswers Call.

I hope you will join us. Register by clicking here.

Things That Drive Me Crazy

Nothing to report this week. I’m sure that this will change. Stay tuned.