A growing number of experts across the industry say that hedge funds need to come clean about the way they work.
More and more investors want to know where exactly their money go and what happens when they disappear into the market. These and other quite uncomfortable questions hedge funds are getting asked this year.
Well, it looks like they owe the public some answers. At the beginning, hedge funds worked as highly secretive organizations available to a small group of elite investors. Even though now hedge funds welcome far bigger investor groups, they are still uncomfortable with being transparent. And this is exactly what today's investors demand.
Business Insider has published a selection of documents on one of the biggest hedge funds, ValueAct, to shed light on these questions. Lack of transparency is one of the big topics discussed there, as hedge funds don't welcome much of it in their business. They tend to work without comparing themselves against any kind of metrics (especially when they underperform), what makes it very difficult to analyze their business processes.
Another aspect of hedge funds' business that raised a lot of questions is their ridiculously high fees. Warren Buffet, an iconic investor and a billionaire, have commented on this earlier this year:
"Really, it's befuddled me, and I'm in the industry. How the industry's gotten away with the high fees for so long for what in effect is beta, market exposure," he said.
The normal service fee charged by hedge funds is 2% of total assets plus 20% of the profits made.
In a recent report, Goldman Sachs (TOCOM: Futures On Gasoline Feb 2017 [GS]) has criticized hedge funds for being too similar to one another while not offering any special services. The bank said that they essentially focus on the same stocks, making them highly concentrated and less profitable in the end.
Some experts say that as the market gets more and more competitive, the need for so many hedge funds gradually disappears as only a few of them can really help investors to make profits when the market goes in the downward direction.
Anyway, hedge funds still have a big place in the market, like a $16 billion ValueAct, but investors don't expect any magic from them anymore.