As we 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.