> November 2013

Illustration by Mitch Blunt


A Novus research study on hedge fund data and what to do with it.

Hedge Fund Transparency Spectrum
By Stan Altshuller

These days we hear a lot about hedge fund transparency. But what does all the recent change in manager reporting practices mean for the institutional investor? What data is available out there? More importantly, which data is useful for evaluating mangers? In this short study we explore different sources of hedge fund transparency and share ways that some shrewd investors are using it to evaluate managers differently and select better funds.


> Hedge Fund Transparency Spectrum November 2013



The aftermath of the 2008 global financial crisis profoundly influenced the expectations and demands for hedge fund transparency and reinforced the overall industry trend towards greater opacity in the alternative investments industry. Fueled by government legislation like the recent Short Selling Regulation in Europe1 and private initiatives like the “Open Protocol” risk reporting standard, data around hedge funds is now being produced at a dizzying and ever-increasing pace. Case in point: There is global public positional data for institutions, private exposure data for funds, leverage and risk information, performance figures, portfolio positions for managed accounts, and more. This deluge of data comes in different formats and frequencies from disparate sources. To an investor trying to make sense of it all and extract actionable insight from the mountain of data may seem a daunting task. Yet for all its perceived labyrinthine complexity, the whole of hedge fund investment

and analyzed by investors. Exposure data is information found on monthly risk or transparency reports that investors receive from managers. There are no set standards for reporting such data; therefore, managers are free to choose what to report and how they want to portray their portfolio positioning and risks. Often, managers will break down their positioning and leverage by categories such as geography, market capitalization or sector. In this paper, we refer to such category breakdowns as exposure data. Position data refers to portfolio securities, complete with security names, identifiers, market values, and potentially even P&L associated with each line item. There are two very different flavors of position data: public and private. Public filings are a powerful, freely available, yet under-utilized source for insight on investment managers, albeit with limitations. Private positions, on the other hand, are more difficult to obtain but have fewer

<<The whole of Hedge Fund investment data can be broken down into three levels of transparency:
data can be broken down into three broad categories, or, as we refer to them, three levels of transparency: returns, exposures, and positions. Returns are the least granular level of data, as well as the most normalized and widely accessible, which is why they are the most often analyzed and relied-upon data source for investment decisions. While exposures and positions may yield metrics that have more predictive power than return-based stats, they are not nearly as organized, normalized, and accessible. Hence, they are far less understood

Returns, Exposures, and Positions. >>
limitations, except perhaps a lag on reporting. The lag will depend on the sensitivity of each individual manager but matters little for purposes of historical analysis. The transparency spectrum on the next page focuses on private data. What data do managers make available to investors? What is the breakdown in terms of transparency levels? To answer these questions, we analyzed over 600 funds of various strategies that report at different levels of transparency. Our findings follow.

1 European Short Observer, Stan Altshuller, Yuanjie Zhang https://www.novus.com/article.html#esd_q213


> Hedge Fund Transparency Spectrum November 2013

Hedge Fund Private Transparency Spectrum
Breakdown of Data Reported to Investors by Hedge Funds
Top-line & AUM

2 categories 3 categories

No P&L P&L


11% 21% 10%




51% 30%

96% provide better transparency

89% 89% provide worse transparency

79% 38% 49%






PERFORMANCE METRICS Annualized Return Standard Deviation Downside Deviation Sharpe Ratio / Sortino Up / Down Capture Correlation Alpha / Beta Skewness / Kurtosis

PORTFOLIO METRICS VIA EXPOSURES AUM Change Position Count Sector Shift / Mkt Cap Capital Flows

PORTFOLIO METRICS VIA POSITIONS Concentration Overlap / Uniqueness Liquidity / Turn-Over Fundamentals (P/E)

SKILL-SET METRICS VIA EXPOSURES Exposure Management Asset Allocation Use of Leverage Market Timing Sector Selection

SKILL-SET METRICS VIA POSITIONS Trading Acumen Position Sizing Liquidity Mgmt Batting Average Win / Loss Ratio Security Selection

This graphic depicts levels of reporting for approximately 600 hedge funds. Returns, exposures, and positions are the main levels, with exposures and positions further broken down. “Exposures 2 Categories” means exposure-level transparency is provided for at least two categories (asset class, industry, geography, or market cap.) The boxes below the chart show the metrics that can be calculated using the data directly above. For instance, portfolio metric “Liquidity” takes positions to calculate, while “Asset Allocation” in skill-sets can be estimated from exposures. Metrics in the “Portfolio” bucket inform the analyst on portfolio attributes and changes. “Skill-Set” metrics have to do with behavior and decisions of the portfolio manager.


Most analysis done here

Most predictive metrics tend to be here


> Hedge Fund Transparency Spectrum November 2013


The key point is that almost 90% of funds provide granular exposure data, and over 20% of funds provide full position-level transparency. In addition, if managers report to a risk aggregator with the ability to conceal security identifiers from the end user, we estimate the number is around 50% – 60% of funds willing to provide full position detail. If most of your mangers are providing data at the left side of the transparency spectrum, it's in your interest as an investor to push mangers as far right as they will go. If your manager provides only returns, point out that 96% of the universe provides

a distribution of monthly returns, but what if you need to know how the liquidity of your manager’s portfolio has changed? Metrics offering insight on portfolio characteristics that can be calculated from exposures are AUM change, position count, sector and style drift, capital flows, and market capitalization distribution. Other portfolio metrics require positional detail, for example: concentration, overlap/crowdedness, uniqueness, liquidity, turnover, and many fundamental valuation metrics like the asset-weighted PE ratio of your managers’ portfolios. Skill-set metrics can shed light on the fund

will not exceed the depth and quality of your data >>
better data. More and more investors are asking for deeper transparency, and managers are complying. Even if you have never asked for positions from a manager, ask now. If you get pushback, concede a lag. If they will not provide positions, ask for a detailed exposure and attribution report broken down by the categories that matter most to you. In addition to data from managers, there are public holdings on thousands of institutions available freely on the Web. For U.S. managers, holdings forms are hosted on the SEC’s EDGAR database. But simply collecting large amounts of data without doing anything with it is at best useless and at worst dangerous. Why do you need all this data? Because the depth and quality of your analysis will not exceed the depth and quality of your data. There are many more useful metrics you can calculate with position and exposure data as opposed to using only returns. Granted, you can calculate performance metrics like the Sharpe ratio and the tenth moment of

<<The depth and quality of your analysis

manager's investment process, behavior, and decision-making. Some investors find that skill-sets are even more interesting to study than portfolio characteristics because they tend change at a slower pace than other metrics. Skill-sets that can be estimated from exposure data include exposure management, asset allocation, leverage use, market timing, and sector selection, among others. Additional skill-sets that can be calculated using positional data include trading acumen, position sizing skill, win/loss ratio and batting average, and, finally, security selection skill. Such depth of understanding manager portfolios requires a fairly robust effort of data aggregation, management, normalization, and analysis. But, of course, we feel the rewards of picking better managers and avoiding bad situations are well worth it. Consistent alpha generation requires a solid investment process, one that is data-driven, evidence-based, and unbiased. The process always starts with controlling your data.



FOR MORE INFORMATION, CONTACT Stanley Altshuller Chief Research Officer stan@novus.com

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