Hedge Fund Due Diligence

How Hedge Funds Use Different Internal Controls

There was a recent study conducted on hedge fund auditing and oversight practices, specifically, why do hedge funds use different internal controls? The study showed funds use greater internal controls to comfort their investors. Conversely, some funds use less internal controls because they do not want to expose their investing positions to outside oversight. The level of internal controls also translates into higher fees. How hedge funds use internal controls is a critical issue today as more hedge funds incorporate more sophisticated auditing and oversight practices. In the following video, one of the study’s authors, Wharton Professor Gavin Cassar, shares some of the most surprising findings.

Professor Cassar cites a number of examples of internal controls in the hedge fund industry. He finds that offshore hedge funds have better internal controls than U.S. onshore hedge funds. Another conclusion is that hedge funds with better internal controls charge a higher fee. Those hedge funds using a short-selling strategy will also use less auditing and oversight practices. This may be because hedge funds holding a short position want to limit the chances of an outsider taking advantage of this knowledge with a “short squeeze.” Contrary to popular belief, younger hedge funds employ greater internal controls than experienced hedge funds. This may be a way of compensating for the lack of experience and better oversight may entice wary investors.

A family office may have to choose hedge funds with increased internal controls which could protect against fraud and risky exposure even if it means a younger fund or paying higher management fees.

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Hedge Fund Updates

Hedge Fund Tracker Updates

Much of what we do for HedgeFundBlogger.com happens behind the scenes. One of these activities is the building of Hedge Fund Tracker Profiles. Our team is consistently building free-to-access profiles on over 1,000 hedge funds. Over the last week we have updated these hedge fund manager profiles:

• Tudor Capital
• DE Shaw Group
• Pershing Square Capital Management
• Harbinger Capital Partners Hedge Fund
• Millennium Partners
• SAC Capital Advisors, LP
• Highland Capital Management
• Fuchs Capital Partners

Browse over 1,000 hedge fund manager profiles within our Hedge Fund Tracker Tool.

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• Bramdean Asset Management
• Brevan Howard
• Bridgewater Capital
• Brotman Capital Management Hedge Fund
• Brummer & Partners, LP
• Cambridge Place Investment Management
• Carlson Capital Management Partners LP | Hedge Fund Notes
• Centaurus Capital

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Tracker Updates

Hedge Fund Tracker Tool

Our team has recently updated the following Hedge Fund Tracker profiles:

• Man Investments Group
• Lansdowne Partners | Paul Ruddock
• Sparx Group Co. Ltd
• Children’s Investment Fund Management TCI
• Ellington Management

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Hedge Fund Investing

Hedge Fund Investing Survey

A recent survey completed by Deutsch Bank AG polled over 1,000 institutional money managers and rish investors around the globe who control close to $1 trillion in hedge fund allocations. Each respondent was able to select multiple choices and as usual investment performance remained the most important factor in making an investment. One interesting point that came out of this year’s survey was that Risk Management has taken precedence over manage pedigree.

“Over the past eight months, the jump in volatility and the large market moves revealed which funds were bearing which risks,” said Maarten Nederlof, New York co-head of Deutche’s Hedge Fund Capital Group. “Now investors are very focused on risk management to explain the risks being taken and whether they are deliberate and under control.”

Read more articles like this within the Hedge Fund Performance Category of this hedge fund blog.

- Richard

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Hedge Fund Investors

Attracting Hedge Fund Investors

I recently received this email…

Richard, I am involved in the management of a new hedge fund that we started last year. Our hedge fund’s strategy is a combination of stock and derivatives. Our goal is 30%+ growth per year, and thus far, we are right on track. What I wanted to ask you is this: Are these types of earnings competitive within the hedge fund world? If we continue with this kind of performance, would this type of growth be attractive to third party marketers?

John, If you could sustain 20%+ returns over 5,7 and 10 years and show positive growth during quarters of negative equity market performance it will help. The incentives in the hedge fund world favor those that are long-term greedy not quarter-to-quarter or year-by-year short term greedy. The trick is consistency. It is better to have a 28% returns for 10 years than 100% returns for 3. You will be attractive to many groups, including some third party marketing firms if you have a deeply experienced team, understandable and repeatable investment process, solid returns, good portfolio risk controls and a sound business behind all of this. A recent report showed that institutional investors look very closely at the risk management controls in place for both the portfolios being managed and the hedge fund business itself.

Here is a direct link to the article mentioned above: Institutional Hedge Fund Marketing

Interested in hedge fund marketing? Read dozens of more hedge fund marketing & sales articles along with details on third party marketing within the Hedge Fund Marketing Guide.

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Hedge Fund Investing

I just read an article a couple days ago that sounded like a similar one of mine you might have read called “How to Invest in Hedge Funds.” This article was by Scott Frush and it covers the seven strategies for successful hedge fund investing. Here is his 7 tips for investing in hedge funds. None of the tips below are financial advice from myself or from the author of the article that I am summarizing below.

1. Do Your Homework

Since hedge funds are not regulated by the SEC or government, it’s up to you to research and evaluate a hedge fund before investing in it.

2. Invest In Proven Managers

Although investing in a manager with an impressive past performance will not guarantee the same results, it is a good rule of thumb to follow. Generally, look for hedge fund managers with a record of generating consistently good returns.

3. Find An Investor-Friendly Hedge Fund

Search for flexible, investor-friendly hedge funds that offer investors agreeable provisions–like for example: high-water marks or a reasonable fee structures. This is secondary to a hedge fund’s performance record but it is still an important consideration when deciding which hedge fund to invest in.

4. Consider Hedge Funds In the Context of Your Entire Portfolio

Understand your hedge fund investment within your overall portfolio. This means understanding the effect that your investment has on the rest of your portfolio, so as not to unbalance your portfolio with the addition.

5. Diversify

A good way to diversify is to invest in funds of hedge funds, which offer an immediate investment in a variety of hedge funds. However, if you don’t diversify with funds of funds it is wise then to invest in multiple managers or even some different strategies to improve your overall portfolio.

6. “You Gotta Know When To Fold Em’…”

Even if you follow all these strategies and thoroughly research your hedge fund investment there is a chance that it just won’t work out. If this is the case, whatever the reason, you have to know when and how to walk away. Some hedge funds have obstacles to withdrawing your investment that you should be aware of. If the investment does not appear to be working out, quickly withdraw.

7. Be A Smart Rational Hedge Fund Investor

The key to investing in hedge funds–or just investing in general–is to be informed and act rationally when managing your portfolio. To become a smart and logical investor you need to learn the important lessons of hedge funds and have a firm grasp of the investing basics. Acting rationally means avoiding common behavioral blunders that often plague investors like denial, overconfidence or following the herd instinct. The key to hedge fund investment is to act intelligently and rationally.

I summarized the article above because it was interesting and practical. None of the above should be regarded as financial advice or solicitation to invest or purchase anything related to hedge funds.

- Richard

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Original Article Source: Wealth Management Exchange

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Hedge Funds Crush Mutual Funds

Interesting fact for anyone out there working in the hedge fund industry or tracking its growth. In 2007 hedge funds have gained over $279 billion in assets while mutual funds have only gained $79 billion.

“The hedge fund industry’s 3.5% return in October was the highest in the past seven years,” says Sol Waksman, chief executive officer of BarclayHedge Ltd. “Nevertheless, recent market turmoil has made investors a bit more cautious about investing in hedge funds.”

- Richard

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Article Source: HedgeWeek

The Benefits of Hedge Fund Investing

There are many benefits of investing in hedge funds. Most of these are not readily explained with news articles that you might read in the Wall Street Journal or Investors Business Daily. Below is a white paper updated in 2006 that discusses the benefits of investing in hedge fund portfolios.

Hedge Fund Investing Benefits White Paper

- Richard

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There aren’t very many solid online resources on investing in hedge funds or the basics of hedge fund investing. Millions of HNW individuals invest in hedge funds, tens of thousands work in the industry but there are only 3-4 really robust websites that detail what they are and how they work. This is interesting and I think there is space for a few more competitors to the likes of HedgeWorld & HedgeCo.

I think it would be great if there was an Invetopedia/Marketing Sherpa like website focussed just on resources for those investing in hedge funds.

Anyone else get the same feeling or am I missing a few majoronline resources for those looking to learn more about investing in hedge funds?

- Richard

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