Sunday, November 30, 2008

The four transparencies

A story in Friday's Financial Times (p. 18) formulated with some concision a point I've been mulling for some time. We'll hear a lot about "transparency" in coming months, from regulators in many countriesand in multi-national groupings as well. But "transparency" as it applies to investment funds refers to four very different facts, and it is well that we not lump them together.

In the words of Andrew Baker, of AIMA, as quoted in the FT, it could be "transparency of holdings, transparency of transactions, transparency of who the underlying investors are or of what the performance is".

The case for the proposition that information is and ought to remain proprietary, and thus opaque, is strongest with transactions and holdings. Leaks in these areas contribute to bandwagon effects, or to a sort of ganging up on the injured wildebeest, and in either case the managerial reflex of keeping things close to the vest appears perfectly sensible.

Conversely, the case for transparency is very strong in the matter of investor identity (given the global concerns over money laundering and the financing of terrorist activities) and strong, as well, on performance (in that Mr. Market ought to be able to make comparative judgments).

Let's keep these distinctions in mind. A principle extends no further than the reasons for that principle.

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