The hedge fund industry must increase transparency through an “ambitious” system of industry-wide data standards, Northern Trust has urged.
Arguing that more can be done to close the gap between the expected level of transparency demanded by investors and the approach taken by most of the industry, the white paper by Northern Trust argues that a new approach to data collection is needed to achieve such a goal – one that involves a significant increase in data administration.
It proposes that the hedge fund industry outsource its middle and back-office provision, with a second administrator appointed to conduct quality control rather than an internal shadow accounting record being required.
Once the two administrators are in place, their output can be compared for quality purposes.
“The biggest functional challenge inherent in this model is data integration – an efficient process requires all three parties to be working off of a single, accurate, normalised data set,” the paper says.
“Creating an industry standard for data integration is an ambitious goal.”
The paper goes on to explain that, until the standard is in place, a double pipeline will be needed.
“But the forces driving the hedge fund industry today – investor needs, an increasingly competitive marketplace, more complex financial markets and regulator scrutiny – are creating very real needs for integrated data solutions,” it says.
Northern Trust argued that it was most important for companies to be able to submit to, and investors to draw from, a single data set, reducing the risk that hedge funds’ investment approaches will be made public.
The calls for greater transparency and comparability were in line with the firm’s hedge fund survey, which found 55% of respondents were in favour of greater disclosure, even if managers themselves believed that the level of disclosure in place was sufficient.