Vol 5 (2008) - Issue 3

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Recent Chapter 11 Decisions and their Impact on Hedge Fund. Practices: Will the Mystery be Unveiled?

The central point of this essay is to investigate in how far recent court decisions have positively contributed to the requirement of increased transparency in hedge fund practices.

The Latin words ‘trans’ and ‘parere’ put together mean ‘shown one self ’ and aim to contribute in guaranteeing an ‘effective due diligence1’ by unveiling hedge fund’s secrets. A conditio sine quae non for more transparency therefore refers to more public disclosure.

Hedge funds ‘lack’ transparency as their manager(s) are not willing to divulge much strategic information to investors on the contents of the fund’s portfolio. Giving such information could be abused by competitors and result in a strategic disadvantage.

Contrary to this view some state that competitive pressures are an incentive to disclose information voluntarily and stress the importance of a dialogue between investors and managers. From either perspective more transparency would definitely influence risk measurements and management processes.

The increased importance of hedge funds in financial markets and the greater amount of money and investors involved in hedge fund practices form on first sight strong arguments for more disclosure.

More public disclosure is seen as an answer to the need for more protection. This essay will try to demonstrate the danger of drawing that conclusion.

Hedge funds and disclosure regulations

At the world economic forum in January, held in Davos (Switzerland), it was clearly stated that the regulation of international standards of hedge funds should be based on principles rather than being caught in rule based frameworks. One of these principles should refer to a certain level of public disclosure requirements otherwise this would result in fraud, lack of investors’ protection, and an attractive vehicle to be used by organised criminals or terrorists engaged in money laundering. In recent years there has been a strong growth of a disclosure-based philosophy in dealing with hedge funds.