Why do Hedge Funds Lack Transparency

Hedge funds are sometimes criticized as lacking transparency. There are a number of reasons for this.

For one thing, they are privately organized entities with minimal regulatory oversight. They are not required to disclose their holdings and strategies, so they do not.

Closely related to the lack of regulation is the fact that they are only marketed to qualified investors – those who presumably have both the sophistication to understand the strategies and the capacity to accept losses. These qualified investors may be able to glean information about the fund, but public investors, who are not able to invest in the fund anyway, are not.

Perhaps the most significant reason, however, is competitive secrecy. Hedge funds are competing both for investment funds and for investment opportunities. They often employ sophisticated techniques that could be compromised if they were widely known.

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See also:
  • Risk Transparency versus Position Transparency
  • Determinants of Funds of Hedge Funds Performance
  • Alternative Routes to Hedge Fund Return Replication
  • Types of Hedge Funds
  • Are Hedge Fund Strategies Just About Leverage?
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