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Owing investors transparency about data management and manipulation
September 23, 2006 (HedgeWeek)
Armelle Guizot outlines the importance of properly mining and evaluating data to the successful assessment of hedge fund performance.
In his book "The Number," Alex Berenson best characterizes reality about data manipulation during decades primarily in Wall Street investment banks to produce the quarterly corporate earnings that most investors traded to get fatter salaries, fees, stock options, bonuses and perks.
While investment bankers are laying low now about data manipulation, calibrations and distortion, an army of compliance officers, risk managers, statisticians, mathematicians and actuaries are surfacing and concerned with providing qualitative information to reveal much about funds' returns.
But while some paid their dues, with, by the way, still much left in their pockets, others such as hedge funds' managers kept riding the bulls ever since the downfall of Long Term Capital Management in 1998, by cumulating profits from tweaking and twisting by little notches the Net Asset Valuation or NAV and by generating significant fees. At large, pricing and positions of funds' clients get even more interesting within prime brokerage firms conducting their own hedge funds' operations without Chinese Walls between entities.
Hedge funds' databases come and vanished with matured markets on a rolling basis: Trading Advisors Selection System (TASS), Centre for International Securities and Derivatives Markets (CISDM) (ex_MAR/Hedge), Hedge Fund Research (HFR), Altvest Lipper Reuters, Edhec-Risk, or EurekaHedge. Some overlap while others have geographical biases. Strategic Financial Solutions reports that the biggest and the five largest databases account for 44% and 84% of 8,800 funds composing as of 2006 less than 10 databases. Poor returns goes hand and hand with industry data biases defined as:
AntiSpin: Nothing we haven't been warning you about since 1998, but if you have even $1 in US equity markets, you 'll want to know the details. You can find them here: thenumberbook.
September 23, 2006 (HedgeWeek)
Armelle Guizot outlines the importance of properly mining and evaluating data to the successful assessment of hedge fund performance.
In his book "The Number," Alex Berenson best characterizes reality about data manipulation during decades primarily in Wall Street investment banks to produce the quarterly corporate earnings that most investors traded to get fatter salaries, fees, stock options, bonuses and perks.
While investment bankers are laying low now about data manipulation, calibrations and distortion, an army of compliance officers, risk managers, statisticians, mathematicians and actuaries are surfacing and concerned with providing qualitative information to reveal much about funds' returns.
But while some paid their dues, with, by the way, still much left in their pockets, others such as hedge funds' managers kept riding the bulls ever since the downfall of Long Term Capital Management in 1998, by cumulating profits from tweaking and twisting by little notches the Net Asset Valuation or NAV and by generating significant fees. At large, pricing and positions of funds' clients get even more interesting within prime brokerage firms conducting their own hedge funds' operations without Chinese Walls between entities.
Hedge funds' databases come and vanished with matured markets on a rolling basis: Trading Advisors Selection System (TASS), Centre for International Securities and Derivatives Markets (CISDM) (ex_MAR/Hedge), Hedge Fund Research (HFR), Altvest Lipper Reuters, Edhec-Risk, or EurekaHedge. Some overlap while others have geographical biases. Strategic Financial Solutions reports that the biggest and the five largest databases account for 44% and 84% of 8,800 funds composing as of 2006 less than 10 databases. Poor returns goes hand and hand with industry data biases defined as:
- Survivorship bias : a statistical bias in performance aggregates due to inclusion of only live funds and exclusion of liquidated or non-reporting funds.
- (Self) selection bias : database represents a universe sample. Funds not reporting due to superior returns offset those reporting due to poor performance. Joining a database is for marketing.
- Instant history or backfill bias : this occurs when a fund enjoys positive returns to report.
- Liquidation bias : this arises from disappearing funds no longer reporting final periods near liquidation times.
- Static versus Dynamic Data Inaccuracy arises from on going data changes not dynamically updated.
AntiSpin: Nothing we haven't been warning you about since 1998, but if you have even $1 in US equity markets, you 'll want to know the details. You can find them here: thenumberbook.
In this commanding big-picture analysis of what went wrong in corporate America, Alex Berenson, a top financial investigative reporter for The New York Times, examines the common thread connecting Enron, Worldcom, Halliburton, Computer Associates, Tyco, and other recent corporate scandals: the cult of the number.
Every three months, 14,000 publicly traded companies report sales and profits to their shareholders. Nothing is more important in these quarterly announcements than earnings per share, the lodestar that investors -- and these days, that's most of us -- use to judge the health of corporate America. earnings per share is the number for which all other numbers are sacrificed. It is the distilled truth of a company's health.
Too bad it's often a lie. thenumberbook provides a comprehensive overview of how Wall Street and corporate America lost their way during the great bull market that began in 1982. With fresh insight, wit, and a broad historical perspective, Berenson puts the accounting fraud of the past three years in context, describing how decades of lax standards and shady practices contributed to our current economic troubles.
As the bull market turned into a bubble, Wall Street became utterly focused on "the number," companies' quarterly earnings. Along the way, the market lost track of what companies are really supposed to do -- build profitable businesses with sustainable futures. With their pay soaring, and increasingly tied to their companies' shares, executives were more than happy to give Wall Street the predictable earnings reports it wanted, whatever the reality of their businesses. Accountants, analysts, money managers, and individual investors played along, while the Securities and Exchange Commission found itself overwhelmed and underequipped to cope with the earnings game.
thenumberbook offers a unified vision of how today's accounting scandals reflect a broader system failure. As long as investors remain too focused on the number, companies will find ways to manipulate it. Alex Berenson gives anyone who has ever invested in -- or worked for -- a public company the tools necessary to see beyond the cult of the number, understand accounting and its limits, and recognize patterns that can lead to fraud. After two decades of stock market hype, thenumberbook offers a welcome dose of truth about the way Wall Street and corporate America really work.
This will surely be the most important financial book of the year. Every CEO, CFO, CPA, broker, money manager, and congressperson in America will want to read it -- that's a given. But plain old investors will, too. 'So that's what happened to my 401(k),' they will say."
- ANDREW TOBIAS, AUTHOR OF THE ONLY INVESTMENT GUIDE YOU'LL EVER NEED
Every three months, 14,000 publicly traded companies report sales and profits to their shareholders. Nothing is more important in these quarterly announcements than earnings per share, the lodestar that investors -- and these days, that's most of us -- use to judge the health of corporate America. earnings per share is the number for which all other numbers are sacrificed. It is the distilled truth of a company's health.
Too bad it's often a lie. thenumberbook provides a comprehensive overview of how Wall Street and corporate America lost their way during the great bull market that began in 1982. With fresh insight, wit, and a broad historical perspective, Berenson puts the accounting fraud of the past three years in context, describing how decades of lax standards and shady practices contributed to our current economic troubles.
As the bull market turned into a bubble, Wall Street became utterly focused on "the number," companies' quarterly earnings. Along the way, the market lost track of what companies are really supposed to do -- build profitable businesses with sustainable futures. With their pay soaring, and increasingly tied to their companies' shares, executives were more than happy to give Wall Street the predictable earnings reports it wanted, whatever the reality of their businesses. Accountants, analysts, money managers, and individual investors played along, while the Securities and Exchange Commission found itself overwhelmed and underequipped to cope with the earnings game.
thenumberbook offers a unified vision of how today's accounting scandals reflect a broader system failure. As long as investors remain too focused on the number, companies will find ways to manipulate it. Alex Berenson gives anyone who has ever invested in -- or worked for -- a public company the tools necessary to see beyond the cult of the number, understand accounting and its limits, and recognize patterns that can lead to fraud. After two decades of stock market hype, thenumberbook offers a welcome dose of truth about the way Wall Street and corporate America really work.
This will surely be the most important financial book of the year. Every CEO, CFO, CPA, broker, money manager, and congressperson in America will want to read it -- that's a given. But plain old investors will, too. 'So that's what happened to my 401(k),' they will say."
- ANDREW TOBIAS, AUTHOR OF THE ONLY INVESTMENT GUIDE YOU'LL EVER NEED