If We’re Looking at AUM, Let’s Also Look at LUM

As we

href="http://online.wsj.com/article/SB119585897006002464.html">learned

from the WSJ last month, “assets under management” is not the most

useful of metrics to use when judging the size of a hedge fund.

For example, bond fund Y2K said it had assets under

management of $2 billion as recently as July. But after a tough summer,

London-based parent Wharton Asset Management UK Ltd. said the fund

actually had less than $100 million in investor capital, and that most

of the rest had been borrowed.

If this is a problem, let me suggest a simple solution: that

every fund reporting AUM should also report LUM, or liabilities under

management. For a plain-vanilla long-only mutual fund, that should be

easy: LUM will always be zero. But for funds with leverage, the

combination of AUM and LUM should give a much clearer idea of exactly

what kind of fund they’re running than AUM does on its own, or even if

the AUM figure is accompanied by some vague and ill-defined leverage

ratio.