The fund of hedge funds reporting puzzle

Purpose - The development of alternative investment has not yet been accompanied by genuine consideration of the specific characteristics of the risks and returns of hedge funds with regard to the provision of information to investors. To fill the gap, in 2004 EDHEC launched an international consultation process, seeking to implement a new framework for funds of hedge funds reporting. Design/methodology/approach - The consultation process was based on a series of recommendations proposed by EDHEC with regard to the academic state‐of‐the‐art on risk measurement in the alternative universe. The findings of the survey, which brought together the opinions of 98 institutional investors and fund managers, allow a consensus to be established on the information required for the implementation of a relevant reporting method in the field of alternative investment. Findings - Interestingly, despite somewhat conflicting goals, investors and fund managers, except for slight discrepancies, globally agree on the definition of relevant information, and as a result on the content of the reports of tomorrow. Originality/value - A very large majority of hedge fund managers are satisfied with a reporting method based on a mean‐variance structure, which is totally inappropriate for the risk and return profiles of alternative investment. To address this issue, the paper presents a series of indicators relying on a basic return‐based analysis that allow a true and fair picture of the risk and return characteristics of alternative investment to be drawn. This paper therefore offers a pragmatic but robust answer, for both investors and fund managers, to the fund of hedge funds reporting quandary.