Can Hedge Fund Managers Stop Information Leaks?

What’s unfortunate is that many funds are so fearful of having their information leaked that they water down their reports to the point where they offer minimal value to investors. At a time when investors are asking for more information and transparency from their funds, while being more selective about which fund managers they want to continue to invest with, I don’t feel “saying less” is a smart strategy.


10 December 2010

I recently wrote an article for Hedge Fund Journal and asked the question, “Does having your investor letter or risk report leaked to the media (a.k.a. headline risk) hurt your ability to compete with other firms for allocations or is it just embarrassing?”

I would say both. However, for a magazine like HFJ I needed to answer the question more scientifically. I found a survey of investors conducted by Deutsche Bank. The survey showed that investors did in fact believe headline risk was damaging to a fund’s reputation and a deterrent to investing. What was even more interesting is the survey found that investors, particularly institutional investors, felt headline risk was more of a turnoff than invoking a gate, side pockets or changing liquidity terms.

What’s unfortunate is that many funds are so fearful of having their information leaked that they water down their reports to the point where they offer minimal value to investors. At a time when investors are asking for more information and transparency from their funds, while being more selective about which fund managers they want to continue to invest with, I don’t feel “saying less” is a smart strategy.

So what’s a hedge fund manager to do to stop information leaks?

Option 1: Watermarking
You add a “watermark” of an individual’s name on confidential information. The idea is it will deter authorized users from passing their investor letters or risk reports to the media. A stamped watermark is the most effective type of watermark. It’s actually part of the content of the document, making it very difficult to cleanly remove, particularly if it appears in multiple spots on the document. Unfortunately, while watermark is an effective approach, it still cannot fully prevent an authorized recipient from sharing the information.

Option 2: Digital Rights Management (DRM)
With DRM, you actually control what authorized individuals see and do with your confidential reports.  Step one is to stop sending documents via unsecure email and mail and begin using an information exchange solution to share sensitive and confidential information with investors. Access to risk reports and investor letters is password protected and limited to only authorized individuals.

The second step is to apply DRM technology to those same documents. Intralinks’ DRM functionality enables funds to prevent confidential documents from being forwarded, saved locally, printed or screen printed. Additionally, since DRM encrypts documents, a fund can remotely “shred” an investor letter left on a USB or local drive by revoking the key required to decrypt the document.

Funds can use DRM selectively. For instance, DRM could be applied to text based documents such as investor letters but not a spreadsheet that a fund of funds relies on for data points they incorporate into their own reports. Funds can also apply DRM to documents shared with some recipients but not others.

With this type of approach—password protected access and DRM encryption—hedge fund managers can stop worrying about information leaks, start sharing more information with their investors and invest in growing client relationships.