Transparency: What Counts

04Jan09

Just a quick thought. What enabled frauds like Madoff, Petters, Dreier, and Israel was not the opacity of their strategies or processes, it was the opacity of their operations. For all I care, a manager can use astrology to make his investment decisions. So long as there are material accounting, legal, and brokerage operations in place, at least I know the guy is actually making trades.

Making a representation of position-level transparency does not yield any insight into the quality of the manager’s operations. The obsession with knowing exactly what the fund manager is doing runs counter to the entire idea of outsourcing your wealth management decisions, a.k.a. investing. You don’t need to understand what the fund is doing so long as the fund adheres to its mandate.

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Tags: hedge funds, madoff