Mutual Funds Operations More
Transparent Than Hedge Funds
Investors are concerned these days about more than market performance. Tragic stories of portfolios damaged by investments in unethical hedge funds engaged in activities ranging from deceptive accounting to embezzlement are grabbing headlines. The vast majority of hedge funds are reputable and their clients need not worry, but for investors who prefer greater transparency in their investments, mutual funds may be the answer.
Mutual funds and hedge funds both pool investors’ money to be managed as a single portfolio, but there are significant differences between the two when it comes to features such as liquidity, reporting and investment constraints. Both investment vehicles have their place in the investment industry, but when headlines are filled with stories of Ponzi schemes, mutual fund shareholders can find an extra level of comfort in the required liquidity and transparency employed in their portfolios' administration.
Mutual fund investors have extra measures of protection through government regulation and oversight. Regulation of investment companies began with the Investment Company Act of 1940, which was designed to protect mutual fund investors by mandating the structure of investment companies as well as disclosure of information on operations and investment policies. Mutual fund companies are required to report shareholder account information, fund portfolio holdings and investment policies on a regular basis. This constant flow of information provides shareholders with transparency to know how their money is invested and what parameters the fund manager(s) must follow for investing the portfolio assets. Additionally, it is easy to find out what the value of an account is on any given day because mutual funds normally calculate a share price each day.
In contrast, hedge funds do not have to register as “investment companies” under the Act and, therefore, are exempt from those requirements and subject to less government oversight. They usually are exempted by limiting how many investors they allow into a fund and by requiring those investors to be accredited (meeting certain net worth, net income and investment experience criteria). These high-net-worth investors are deemed able to withstand greater risk, and, therefore, need less protection.
Hedge funds generally have greater freedoms within their investment practices and reporting. For example, they may employ leverage (borrowing money to invest) in an attempt to boost returns, whereas mutual funds are generally restricted from doing so. When it comes to reporting, hedge funds normally send account information to investors with regularity, but they are not required to divulge holdings within the portfolio. Daily share prices, or account valuations, are not normally calculated.
In addition to frequent reporting and daily valuations, mutual fund investors typically have easy access to their money and can make withdrawals at any time. In general, their withdrawal proceeds must be sent out within seven days. Hedge funds typically restrict the timing and amount of withdrawals.
On a related note, Sit Mutual Funds shareholders may be interested in knowing that Sit employees and affiliates are fellow investors in the Funds, owning 11% of the Funds (current percentage ownership as of January 31, 2009). For information on the Sit Mutual Funds or your own account call an Investor Services Representative at 800-332-5580.
