We are, we have to admit, quite ready to highlight some of the weaknesses, inconsistencies and challenges that can face the hedge fund investor. However, we also come across plenty of information which reminds us that the regulated, "grown up" world of long only investing in exchange traded corporations is hardly squeaky clean either.
To this point, a recent article in Bloomberg Businessweek caught our eye, dealing with whether Lehmans' erstwhile CEO, Dick Fuld, had properly disclosed his compensation.
According to the article, Fuld told a Senate Committee that he had made "less than" $310 million from 2000 to 2007. Per Fuld, 85% of his compensation had been in Lehman's shares (eventually worthless), of which Fuld said that he had sold none or, later on in the testimony, at least not the "vast majority".
However, an ex member of the Lehman legal department who had been tasked with tracking executive compensation and preparing regulatory 10K and 10Q filings had a different take on the topic. The article alleges that Lehman had elected not to disclose $100m plus in compensation for Fuld in the form of "restricted stock units", which fell within a disclosure grey area if they were of a long term nature. Moreover, subsequent changes to these stock units after issuance (favorable to Fuld and the Lehman exec group) were also not disclosed. Finally, the article suggests that there may have been discrepancies between different sources of filings as to what stock options were exercised and sold prior to the Lehman balloon going up in 2008.
All in all, a very interesting (and ultimately very disheartening) read. However, this saga reminded us that complex disclosures, be they regulatory of financial, can often lull investors into a false sense of security - as we all know, very clever lawyers spend a lot of time looking for clever loopholes. Ironically, therefore, the "transparency" available to an investor in a publicly traded company always leaves a risk that information available can sidestep full and fair disclosure.
The difference for a hedge fund investor is that we have the ability to complete one on one, face to face, due diligence. This is very different from the analysis of publicly available disclosure filings. Net net, due diligence is always hard work, but if done well, the hedge fund allocator may well end up further ahead in the information game.
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Hedge Fund Operational Due Diligence
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