Hedge Fund Investing: A Practical Approach to Understanding Investor Motivation, Manager Profits, and Fund Performance

Conclusion

The hedge fund industry is changing rapidly in response to many influences and demands. Markets are more uncertain, and it is harder for managers to get an edge that is sustainable. The critical mass needed and the barriers to entry are rising at the same time. Despite these challenges, the industry still attracts capital and will continue to do so. It also provides a refuge for those daring and creative young men and women who want to manage money outside the traditional limitations and constraints. Even though regulation and institutional best practices are creating more rules than ever before, the industry is still creative and entrepreneurial and a place for new ideas.

Traditional managers are tied to very rigid guidelines in their pursuit of investment returns. At times, they must watch helplessly as the value of their portfolio goes into free fall, unable to sell stocks or indices short or use derivatives to protect the portfolio. Hedge funds have been given the privilege to use the widest possible tool set to address the markets, generate a return, and protect principal. Traditional managers lack incentives and discretion to generate absolute returns and often struggle to generate a return equal to their benchmark. Given the choice of allocating capital in uncertain times to those who are creative and freethinking, have access to the widest array of choices, and whose interests are aligned with your own or of allocating capital to those with far fewer tools and ...