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The importance of transparency for hedge funds

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Hedge funds are a class of alternative investments. Most people have heard of hedge funds, but it’s sometimes difficult to define precisely what they do. Part of that is because hedge funds are so secretive. Investors in New York should understand that hedge funds are exempt from many of the disclosures that other investment companies must abide by.

The mysterious nature of these companies is often used as a marketing tool to allure new investors. Investment managers, the people who run hedge funds, often tout that they have an unique investment strategy and they don’t want these details made public because they fear that others would copy their “winning” strategies.

In 2020, three researchers published a paper examining the links between secrecy and success in hedge fund management. They looked at almost 200 hedge funds over the period 2006 to 2009. The source for the material was a database from one of the biggest funds of funds in the country.

Previous research had indicated that secretive hedge funds can deliver positive results for their investors. However, the previous research had looked at hedge funds that maintained secrecy when dealing with the public.

The latest research was different. Researchers looked at funds that maintained an air of mystery even when dealing with others in the finance world. The research showed that this lack of transparency wasn’t linked to improved performance. Instead of being used to protect valuable trade secrets, the secrecy seemed to be designed to cover up risky behavior with other people’s money.

Investors need to be careful about who they put their money with. Though hedge funds are required to register with the Securities and Exchange Commission, they’re less well-regulated than other investments. People who believe that a hedge fund mismanaged their money may consult an attorney experienced in securities fraud.