Having an understanding of what drives the hedge fund manager is critical for investors and their assets. Managers must want that understanding; they need to be able to articulate what it is that causes them to buy or sell a security. It is the drive, ambition, and ability to maintain their edge that separates good managers from mediocre managers. While the main challenge of hedge fund investing is achieving consistent returns, the biggest test is actually dealing with manager hubris. Investors should seek managers who are driven by the intellectual challenge of investing and facing the challenges of the markets. Taking it a step further, the best managers are in fact mercenaries working for the common goal of the manager and the investors. The question that is raised is: how does an investor build a relationship with a mercenary and then deal with the manager when it is time to redeem?
The most frequent reason for redemption is performance results. Although performance-based redemption profiles vary according to investor class, many investors are merely return seekers. They chase the return; in the industry this is called "hot money."
The hot money is usually held by high net worth or family office investors. These groups usually do not go through the same painstaking stages or periods of due diligence to identify the manager; they simply look for managers with good returns and invest.
Institutional investors, including pension plans, invest ...