CHAPTER 2 Cutting through the Black Box: Transparency and Disclosure. Perhaps the biggest challenge facing the hedge fund industry as it enters into a phase of increasing maturity are the issues of transparency and disclosure. | 2 Cutting through the Black Box Transparency and Disclosure Perhaps the biggest challenge facing the hedge fund industry as it enters into a phase of increasing maturity are the issues of transparency and disclosure. Long known for its culture of secretiveness the hedge fund industry has begun to take a more proactive approach to balancing the need to keep investors informed while at the same time protecting the confidentiality often essential to implementing their investment strategies. The literal meaning of the word transparency is the state of being easily detected or seen through readily understood or free from pretense or deceit. See Figure . But transparency of a different variety has become a central theme of discussions concerning hedge funds. Transparency in this sense refers to the ability of the investor to look through a hedge fund to its investment portfolio to determine compliance with the fund s investment guidelines and risk parameters. Transparency essentially allows investors to see what managers are doing with their money. At first glance the request for transparency seems like a reasonable one. After all investors certainly would not blindly trust hedge fund managers who are managing a sizable portion of their wealth. Undoubtedly they would want to monitor not only the managers overall performance but also the nature of the trading activity and the risks undertaken. In comparison the Securities and Exchange Commission 23 24 HEDGES ON HEDGE FUNDS Transparency FIGURE Transparency Defined. SEC requires mutual funds to offer total transparency. Why should hedge funds be exempt from disclosing valuable information to the investing public That question is currently under discussion by investors and regulators. Pressure of impending regulation has led to broader disclosure practices by hedge funds in recent years. See Table . The quiet interworkings of a competitive capital market are another reason for increased attention to the .
