Q&A: Gemini’s Andrew Rogers Says Hedge Funds Can Benefit From Transparency

Mar 3 2010 | 12:02am ET

While hedge funds continue to increase in popularity among both institutional and retail clients, a fair amount of skepticism and wariness about the asset class remains. Investors are demanding transparency, and the hedge fund industry—often labeled as secretive and opaque by the mainstream press—is giving it to them.

Andrew Rogers, president of Gemini Fund Services, has watched as the industry has moved out of the shadows and into the mainstream investment arena. Rogers recently spoke with FINalternatives about how hedge funds can not only be transparent, but how they can use this new openness to their advantage.

Hedge fund transparency is a growing issue. What are some of the main reasons behind this?

There are two main forces pushing the hedge fund industry to become more transparent. First is the tremendous growth in hedge funds over the past decade. Second is the shift among both institutional and retail investors toward alternative strategies, including hedge funds. As hedge funds gain more market share and widen their client base, they will naturally have to address greater demands for disclosure from both investors and policy makers.

Although there is increasing demand for hedge funds, investors are still cautious. Why?

For many years, institutional investors—corporate pensions, family offices, and so forth—mostly adhered to the Morningstar style boxes. But the financial crisis of 2008 has accelerated the shift toward alternative strategies and increased the appetite for better diversification.

In the last decade, investors have watched traditional assets fall by 30% or so. This has played well for investment managers that specialize in non-correlated or alternative products and strategies. Yet hedge funds are, of course, unregulated and lack transparency. Investors are increasingly concerned about a hedge fund’s compliance program and lack of transparency. The recent Ponzi schemes and lack of liquidity and transparency have caused this great concern among investors.

How can or should the hedge fund industry respond to this dynamic?

It’s hard to think of another market where people want to buy something but are also suspicious of what they want to buy. Hedge fund managers really have just two choices. They can ignore these trends, or they can take them on as an opportunity for growth. If they’re able to address the inevitable questions of transparency, they’ll be more likely to reap some rewards from the situation.

What are some ways that hedge fund managers can address the transparency issue?

On the institutional side, everyone wants an independent set of eyes on their assets; that means having an external fund administrator. That is the baseline. Next is disclosure. Most hedge funds report their net asset value, or NAV, on a monthly basis. If a manager can provide more disclosure, daily NAV for instance, that’s something institutions will likely find appealing.

Not all hedge fund administrators can provide daily NAVs, so the fund administration industry will need to evolve as well. If the assets a hedge fund invests in are liquid, daily NAV should be a pretty straightforward process.

Where do you see the issue of hedge fund transparency heading in the future?

We expect to see a continued trend toward hedge funds providing more granular reporting to investors on a timely basis.  In addition, we wouldn’t be surprised to see the use of benchmarks gain more traction. Outside of the hedge fund industry, every other product that institutional investors purchase have clear benchmarks to measure their performance against. The hedge fund world has been different to date, but there could be a market opportunity in this area.

What about the retail market? What is the opportunity there?

Similarly to institutions, retail investors are starting to think outside the traditional style boxes. As a result, we’re seeing an uptick and real growth opportunity in hedge fund-like mutual funds. There are more than 16,000 U.S. mutual funds tracked by Morningstar, and of those under 500 are categorized as “alternative” funds.

So there is enormous potential in this realm. If you’re an investment manager looking to launch a product, are you going to create another large cap value fund, and be one of over 1,000 similar funds? Or do you want to stand out by jumping into a much smaller pool?

In terms of transparency, hedge fund-like mutual funds can deliver the alternatives exposure that retail investors are seeking, with all the transparency and accessibility of a traditional mutual fund. Mutual funds are valued daily, regulated and sold to the general public.

Overall, what is the biggest opportunity presented by the trend toward transparency in hedge funds?

The big opportunity is to create alternative investment products that are priced daily for both the institutional and retail markets. In terms of asset gathering, this can make a lot of sense. There is a saying that of the top 10 things that managers consistently worry about, one through seven is raising money. Creating hedge fund-like mutual funds allows alternative investment managers to play in both camps, widen their client base and potentially raise a lot more assets.


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