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

Learn from the Past—from Both Successes and Failures

Getting caught up in the past success of hedge fund investing is quite easy. In fact, very often an investor's previous success or past association with an industry legend can create just enough hubris to get the investor in trouble in the future. Investors like to believe they have found the next George Soros, Jim Simons, or Paul Tudor Jones. They rarely like to mention when they end up having found the next Madoff or allocated capital to yet another fraudster with supposed investment superiority or acumen.

So why do funds fail? There are many reasons. Investors should remind themselves of those reasons and seek answers about previous fund failures in the strategy they are considering as part of the due diligence process. Funds can fail as a result of bad investment decisions. Funds can make several compounded bad decisions or just a few concentrated calls on the markets or individual securities that perform very poorly. Funds can also fail due to all sorts of frauds, including accounting frauds, valuation frauds, or misappropriation of funds. Fund can fail due to excessive leverage, improbable probabilities, unexpected events, and tail risk. Funds can fail due to a flood of unanticipated withdrawals of capital at the least opportune time. Funds can get caught in squeezes by the street or by other hedge funds. Fund can fail as a result of a lack of supervision or compliance controls related to insider trading. Funds can fail ...