Hedge Fund Rankings: CNBC’s on Your Side!

Every local TV news channel has some segment that helps some consumer in distress--someone wronged by a renegade dry cleaner who made a hole in a beloved cashmere sweater, or a pet owner who bought a mutt instead of a pedigree pure bred. Invariably, the segment is called something along the lines of “the Investigators,” or “XYZ news channel On Your Side.”

This blog entry is my version of that regular feature on your local news. My focus: the returns printed in hedge fund marketing materials, and why a magazine that ranks hedge funds by returns will change their data labeling practices.

I was chasing down a tip for another story when I was sent some marketing materials for the fund of funds, Innovation Fund. The materials were reprints of a ranking published by HFM Week, a trade publication. That’s when I saw something that was a little confusing on the chart that ranked diversified, offshore funds of funds with a minimum of $250m and a 5-year track record.

For 36 months, ending April 30, 2007, Innovation had 4 funds ranked 1, 2, 3 and 4. Pretty impressive, huh? Its top-performing fund, Innovation Principal Shares showed a whopping 112% return. The data, provided by Barclays, said nothing else. Only those eyepopping the returns. And therein lies the problem.

Barclays told me that the data was indeed correct, if you calculated the 3-year return on a cumulative basis. Barclays itself uses compound annualized figures. HFMWeek says its standard is to assume people know it’s a cumulative return. But in light of CNBC’s phone calls, the policy will be revisited. A spokesperson told me, “it does seem prudent to include how we calculate the returns, to be clear.”

The lesson to be learned here: there is NO standard in the industry when it comes to showing returns. And bottom line is, showing marketing materials with big returns catches potential investors’ attention. Claus Bertermann, director of Innovation Fund, said the reprint purchased from HFM Week is “the most powerful marketing tool” the fund has.

Let’s be clear: the cumulative data was correct. It just wasn’t disclosed clearly that the returns were calculated on a cumulative basis. And that’s why you, the investor, must be careful and must ask questions. Marketing materials, no matter what the source of the information, are marketing materials for a reason.

Barclays actually recalculated the Innovation Principal Shares fund using the same parameters. The annualized return? A very respectable 20.8%, which puts it in the number four spot amongst its peers. Bertermann said Innovation would disclose more clearly how its returns, as advertised, are tabulated.

Questions?  Comments?  PowerandMoney@cnbc.com