Evaluating Hedge Fund Performance

CHAPTER 11

A Practical Guide to Investing in Hedge Funds

INFORMATION ON HEDGE FUNDS

This chapter's title is a misnomer. At best it is overly ambitious. The reality is that there is no shortcut in hedge fund investing. Hedge funds' strategies are often complex and sometimes exotic. They do not fully disclose what they do to generate returns. And they do not always return inquiries from prospective investors, or sometimes even their existing clients. They certainly do not advertise in flashy commercials like mutual funds.

It Pays to Look for Good Hedge Fund Managers

However, there are talented hedge fund managers, both emerging and long-established, who are capable of producing or have generated consistent and superior excess returns over time. They deserve to be sought out by investors, large or small. But for any number of reasons, they are choosy when it comes to accepting investors. One very successful manager recounted, “Someone else wanted to come back with $75 million, with meeting after meeting after meeting. I didn't want anything to do with those guys; it wouldn't work. We turned them down,” and rightly so. For as a long/short strategy, this fund would not be suitable for investors who constantly watch the market indexes and become disappointed when the fund lags the market. Most mutual funds and traditional investment advisers would not be as discriminating. In the meantime, there are plenty of mediocre hedge funds, and on occasion, good managers who turn bad and scam ...