130/30 Hedge Funds … Sound Strategy or Hype?

September 20, 2007 | 1 Comment

Gotta Love the Marketing Guys.

It seems 130/30 funds are all the rage these days.  The concept is pretty straight forward - a long short equity fund with 130% long exposure and 30% short exposure.  It’s really tailor made for institutions in that the 130/30 part is a guideline that plan sponsors and their consultants can monitor, and beat up their managers should they diverge from that guideline. 

A very clever marketing tool to say the least, but a chicken shit investment style at the end of the day. 

Is this really a “hedge fund” or closet long and short indexing with fancy hedge fund fees?  We will know the answer to that as soon as we have enough monthly data points to run a few regressions.

There are plenty of studies to show that indexing is the way to go versus active management on the traditional long-only side of the investment spectrum.  Take a look at the average 30% exposure of the short books of these 130/30 funds versus the inverse of the S&P 500, and my guess is that you will find the same results. 

Now, of course, try to do the same analysis on true “hedge funds” and the conclusions are much different.  First, how do you define a passive investment for most hedge fund strategies?  An investable hedge fund index that doesn’t even come close to representing the true universe of hedge funds?  Lots of folks do it, and shame on the average allocator that can’t beat those benchmarks. 

Sorry, I’m a bit of topic here.

What I’m trying to get at is that we should be paying our long/short managers to be active exposure managers.  If the macro environment looks dismal, I would hope that my manager is trimming his exposure to 90/40.  If the market is on fire, let’s see him go to 150/10. 

We’re paying big fees for this stuff folks; let’s make sure our managers are earning it!  I’m sure Gordon Gekko will be running a 130/30 fund in the sequel.
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Do You Have the Necessary Capital to Start Your Hedge Fund?

May 25, 2007 | 2 Comments

This is a very basic question but you might be surprised how many start up managers have not thought through the process. Ok, you know what your what your chosen investment strategy requires to start trading, but what about all those other costs? Assuming you have already spoken to a securities lawyer about your fund and you have set up the appropriate business entity, have you thought about renting business space? Have you figured out what your back office operation will look like? What about setting up a relationship with a prime broker?

Here are some other things you might consider:

What about an executing broker?
What about audit services?
What accounting firms should you consider?
What about technology and data services?
Marketing agents?

Our point is this is a business and you must treat it like one if you are to begin raising seed capital for it. No investor wants to talk to someone who has not even taken the steps to set up a business entity or to think through the initial needs and requirements of the venture. Just so you know, about 18 months ago we wasted some time on a guy who had an excellent concept for a oil and gas company. His ideas were pretty innovative, especially as they were applied to that industry. However, he would not even make the most basic, fundamental investment in his own start up business — setting up a legal, viable business entity. He wanted someone else to pay for it!! He even asked us for the 50K necessary to do so! Then, when we declined, he asked the contacts we introduced him to for the 50K (the capital was to be spent on entity set up and the accompanying legal fees). We pulled the plug on him.

The moral of the story? Get your proverbial ducks in a row before you start trying to raise investment capital for your fund. You will do yourself and your investors a favor — by being professional.

The Importance of Focus when Starting a Hedge Fund

April 26, 2007 | Leave a Comment

My partners and I get inquiries every week from people looking to start up a hedge fund. Some of these folks have good ideas and solid experience, yet we are always amazed at how many aspiring hedge fund managers are not able to articulate their strategy, coherently, in written form. This is especially true with folks who have a proprietary trading background. Many can certainly make money by trading (if their track records are to be believed), but they cannot seem to articulate a focused, concise strategy and/or business plan.

Aspiring hedge fund managers … remember this: investors are looking for a sound strategy that they can sink their teeth into. If you cannot articulate your trading strategy, you are going to have a hard time attracting investment capital. So, take the time to draft a good business plan that outlines your strategy and how you plan to execute against it. If I was an investor and a start up manager approached me about investing in his new fund without being able to explain the strategy simply and easily, I would never touch it. For one thing, it is an open invitation for style drift. Thanks, but no thanks.

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