The Long and Short Of Hedge Funds E-Book

Daniel A. Strachman

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Finance Editions
• Sprache: Englisch

Seitenzahl: 309

Veröffentlichungsjahr: 2008

Beschreibung

An innovative A to Z guide to the world of hedge funds The Long and Short of Hedge Funds presents readers with a unique look at these investment vehicles, the people who run them, and those who provide services to them. This book is a detailed guide of the industry and offers rare access to hedge fund managers and industry participants. The book provides the reader with a real education about hedge funds, gaining a firm understanding of the industry.

Leseprobe

Table of Contents

Title Page

Copyright Page

OTHER BOOKS BY DANIEL A. STRACHMAN

Dedication

Acknowledgements

Introduction

CHAPTER 1 - Hedge Funds Past, Present, and Future

THE FATHER OF THE HEDGE FUND INDUSTRY

WHY INVEST IN HEDGE FUNDS?

UNDERSTANDING THE MARKET

WHAT HAPPENED AT BEAR, AND WHY

WHY THIS BOOK?

CHAPTER 2 - Hedge Funds Today

HEDGE FUNDS IN THE NEWS

HOW HEDGE FUNDS ARE REGULATED

RECENT CALLS FOR REGULATION

HEDGE FUND FEES

COMMISSION GIVE-UP

CONTINUING THE JONES LEGACY

CHAPTER 3 - The Men Who Made the Industry What It Is Today

A FORCE TO BE RECKONED WITH

HEDGE FUND LEGENDS

STANDING ON THE SHOULDERS OF GIANTS

CHAPTER 4 - Running Your Fund Transparently

WHEN GOOD FUNDS GO BAD

WHAT YOU CAN LEARN FROM THE CREDIT CRISIS

FRAUD

INFORMATION EXCHANGE

JUMPING ON THE HEDGE FUND BANDWAGON

CHAPTER 5 - How Hedge Funds are Packaged

FUNDS OF FUNDS

HOW A FUND OF FUNDS WORKS

FUND OF FUNDS ECONOMICS

THE COSTS OF RUNNING A FUND OF FUNDS

FUND OF FUNDS GROWTH

FUND OF FUNDS BUYOUTS

MANAGERS OF MANAGERS

MOM KNOWS BEST

THE PROS AND CONS OF TRANSPARENCY

DIVERSIFYING YOUR PORTFOLIO

AVOIDING COMMON PROBLEMS

CHAPTER 6 - How to Raise Money

FRIENDS AND FAMILY, REFERRALS, AND PERFECT STRANGERS

CAPITAL INTRODUCTION SERVICES

THIRD-PARTY MARKETING

THE ROAD TO WEALTH

IF YOU BUILD IT, THEY WON’T COME

PREPARING THE PITCH BOOK

A FEW FINAL THOUGHTS ON THE ESSENCE OF SUCCESSFUL MARKETING

CHAPTER 7 - The Supporting Staff

THE CARDINAL RULE OF CHOOSING A SERVICE PROVIDER

THE LAWYERS

THE ACCOUNTANTS

PRIME BROKERS

THIRD-PARTY ADMINISTRATORS

INSURANCE COMPANIES

HEADHUNTERS

MATCHING SERVICES

OTHER SERVICES

TAKING ADVANTAGE OF TECHNOLOGY

PARTING THOUGHTS ON SERVICE PROVIDERS

CHAPTER 8 - Fraud, Collapse, and the Kitchen Sink

WHY FRAUD EXISTS

IS FRAUD REALLY RAMPANT IN THE HEDGE FUND INDUSTRY?

WHY HEDGE FUNDS IMPLODE

WHY FRAUD HAPPENS IN THE HEDGE FUND INDUSTRY

HEDGE FUND MISMANAGEMENT

HOW TO PROTECT YOURSELF

MAKING A GOOD FIRST IMPRESSION

CHAPTER 9 - A Few Parting Thoughts

APPENDIX A - Due Diligence Questionnaire

APPENDIX B - Resource Guide

APPENDIX C - Historic Performance of Hedge Funds

Glossary

Notes

Index

Copyright © 2009 by Daniel A. Strachman. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:Strachman, Daniel A., 1971- The long and short of hedge funds : a complete guide to hedge fund evaluation and investing / Daniel A. Strachman. p. cm. - (Wiley finance series) Includes bibliographical references and index.

eISBN : 978-0-470-46618-6

1. Hedge funds. I. Title. HG4530.S838 2009 332.64’524-dc22 2008028066

OTHER BOOKS BY DANIEL A. STRACHMAN

Essential Stock Picking Strategies: What Works on Wall Street (John Wiley & Sons, 2002)

Getting Started In Hedge Funds, First Edition (John Wiley & Sons, 2000)

Getting Started In Hedge Funds, Second Edition (John Wiley & Sons, 2005)

Julian Robertson: A Tiger in the Land of Bulls and Bears (John Wiley & Sons, 2004)

The Fundamentals of Hedge Fund Management: How to Successfully Launch and Operate a Hedge Fund (John Wiley & Sons, 2007)

To Felice, Leah, and Jonah

To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.

Benjamin Graham

The day is short; the task is great.

Ethics of the Fathers Chapter II Verse 20

Acknowledgments

Hedge funds here, hedge funds there, hedge funds are everywhere these days. The media are filled with stories of hedge fund managers and their exploits in the markets and beyond. Hedge funds have gone from obscurity to the mainstream in a very short period of time. The ascent of hedge funds in the marketplace may have been rapid, but make no mistake, there is no getting rid of these unique investment vehicles.

This project is the result of research and interviews with managers and investors around the world. It was quite a bit of work, but a lot of fun. Hopefully, you will find these pages worthwhile and a resource to turn to again and again to answer questions you have about the hedge fund industry.

Two individuals who were particularly helpful were Viki Goldman, the finest librarian I have ever met, and Sam Graff, a man who can make anyone look good in print. Without their effort, support, and guidance, this book would probably not be sitting on any bookshelf. Thanks, also, to Christine Enners for working to gather data, make charts, and deal with a multitude of requests for ridiculous amounts of articles, papers, and information.

I also want to thank Kirsten Miller, who helped shape the manuscript into what it is today. I also want to thank Kate Wood and Pamela van Giessen for green-lighting this project. I have never found a place more supportive of my work. As I have said before, I hope this book is everything they intended it to be when they gave me the go-ahead to write it. I truly appreciate all you have done to publish my work.

No acknowledgments would be complete without a thank-you to my wife, Felice, and my family, for dealing me with during the difficult days. I appreciate your guidance, support, and understanding.

Daniel A. Strachman Fanwood, New Jersey September 2008

Introduction

When I first started writing about hedge funds in the mid-1990s, the industry was something that people had heard a lot about but didn’t know much about. Since then, it has evolved into a major force on Wall Street, reaching as far as Main Street. Hedge fund companies are now the place where everyone wants to work, the industry that everyone wants to do business with, and the big fish that everyone wants to be involved with their charity. The industry is a tour de force. Whether it’s new funds being launched or existing funds getting more assets to manage, Wall Street’s “engine that could” is humming along at a great clip. Some industry-tracking services forecast that the industry will double in size every five years. It is truly wild, and you and I are in the thick of it. What a great place to be!

There are, of course, a couple of things that we need to make clear—rules for the industry and for you that I believe will make things a bit smoother as you read this book. First and foremost, when I refer to a hedge fund, I am talking about an investment vehicle that goes both long and short the market. Second, it’s my opinion that most hedge fund managers don’t really know how to hedge, and merely operate what I consider expensive mutual funds. Make your way through this book and you will understand. For now, just keep these two thoughts in your head, and you’ll be OK. I promise.

Why is the hedge fund industry growing so rapidly? It’s simple, really. Investors have come to the conclusion that long-only investment vehicles (i.e., mutual funds), although important to a diversified portfolio, have one fatal flaw. They make money only when markets rise. Unfortunately, that means when the markets fall, unless the manager has gone to 100 percent cash, the fund and its investors will lose money. There’s no way around this simple fact. Proponents of actively managed mutual funds will tell you that their managers can outperform the indices in both good and bad markets. But you and I both know that you cannot eat relative returns. Simply put, it doesn’t matter if the fund you invested in lost only 10 percent while the index lost 20 percent, because you’re still down 10 percent.

It has taken some time, but investors of all stripes and all levels of investment expertise have concluded that they need to allocate some money to hedge funds, or, more precisely, to funds that go both long and short the market. This will allow their portfolio to generate some alpha without always getting stuck with beta! It makes sense because markets don’t always rise, just as they don’t always fall. The best way to prepare for both possibilities is to invest in vehicles that are able to go both long and short the market.

Hedge funds’ dirty little secret is that investors use them to stay wealthy, not to get wealthy. That’s the story that the press has missed, and that investors and the general public don’t really understand. Uneducated people who think that hedge fund managers are all about taking as much risk as possible in order to make outsized returns are simply wrong. Hedge fund managers make sophisticated, calculated, risk-evaluated trades in an effort to make money regardless of which way the market is going. This fact alone has led some of the most sophisticated investors to use hedge funds. It is why all the major Wall Street firms and some of the minors are looking for an entry into the hedge fund industry. They’re the future of Wall Street, and it’s a glorious time to be getting into the business, either as a manager or an investor.

As the market continues to evolve over the next 5 to 10 years, I expect the lines between mutual funds and hedge funds will continue to blur. I believe there will always be a place for traditional long-only managers who operate mutual funds. Those same managers will lobby Congress to change the laws that govern mutual funds—in particular the Securities Act of 1940—and the mutual fund industry will evolve into the hedge fund industry. This means that before we know it, there will no longer be “mutual funds” and “hedge funds”—there will only be investment vehicles. There will be products for investors that will go long, products that will go short, and some that go both long and short, all covered under the Securities Act of 1940. It may take 10 years, but it is coming. This, dear reader, is where the investment management business is heading, and you need to make sure that you’re pointed in the right direction.

That’s the purpose of this book, to serve as a roadmap to understanding how hedge funds operate, how they raise money, and how they grow from an idea in somebody’s head into a living, breathing entity that manages assets for investors. Along the way, this guide should provide you with ideas on how to take advantage of opportunities in the marketplace, particularly those related to the evolution, creation, and development of a hedge fund organization.

Let the journey begin.

CHAPTER 1

Hedge Funds Past, Present, and Future

Knowledge is power. If you’ve picked up this book, chances are that you already have some knowledge of the hedge fund industry (and if you don’t, go back and read my book Getting Started in Hedge Funds, John Wiley & Sons, 2005). Maybe you’re an investor, and you want the inside story on how to find the hedge fund that’s the right home for your assets. Maybe you’re a new hedge fund manager, in need of tips on choosing an attorney or a third-party administrator. Or maybe you’re a veteran hedge fund manager, eager to learn from—and avoid—the fiascos that have brought down some of the biggest names in the business in recent months.