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The Future of Hedge Fund Investing: A Regulatory and Structural Solution for a Fallen Industry by MONTY AGARWAL

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CHAPTER 7
An Expert Failure
 
 
 
 
In the previous chapter on fund of hedge funds we discussed how a fund of funds is set up, its investment philosophy, and the lack of trading and risk management experience among its key staff. The lack of appropriate industry experience among its key investment staff has led the fund of funds to adopt an academic approach to hedge fund investing. A backward-looking data-mining approach tells the fund of funds nothing about the hedge fund’s strategy, market views, positioning, or risk in the portfolio. Checking boxes in an AIMA questionnaire will not help the untrained analyst tell the difference between a bookrunner and a proprietary trader or the pitfalls of an onshore versus offshore market arbitrage in emerging markets. In the following sections, I will point out the pitfalls of the existing hedge fund investment and due diligence model that has led to critical mistakes by the funds of hedge funds. Unless the funds of funds radically change their hedge fund investing model, they will continue to fail at delivering the expertise they profess to possess.

USELESSNESS OF HISTORICAL DATA CRUNCHING

Every hedge fund manager’s track record comes with a disclaimer, “Past Track Record Is No Indication of Future Performance,” yet the funds of funds investors have based their entire investment philosophy around the track record. A fund of funds will claim that the track record of a hedge fund manager will demonstrate his ability to produce steady, uncorrelated ...

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