| June 23, 2016
| May 23, 2016
Disclaimer: I am not a lawyer. These are just general observations from my non-lawyerly experience. For actual legal advice you should consult your counsel; ironically the same counsel that I will now suggest could be sucking blood out of your organization like a tsetse fly. But either way, don’t listen to me and listen to your lawyer (or a lawyer) instead.
| May 22, 2016
Are You Holding Out On Me?
Investors want to know everything about a fund, and most quantitative funds will not share their models. This alone is often viewed as a lack of transparency and many investors see it as a key point of discomfort relative to traditional equity and fixed income funds. For contrast, when a traditional manager shares their portfolio holdings investors call it “full transparency”. This is belief seems intuitive but is actually pure fallacy.
There is some evidence to show that following ‘smart money’ investors can replicate some hedge funds returns (via tracking public 13-F forms) but there are also some big caveats.
| April 28, 2016
There are a lot of things to look out for when doing manager check-ins, but here are the 15 most critical points to keep track of.
| April 26, 2016
Lets start with the basics then we’ll get into the specific strategies:
Quantitative investing is an approach for implementing investment strategies in an automated (or semi-automated) way. This approach lends itself well to (1) using large or unique data sets, (2) refining them into explanatory information, and (3) deploying that information via as trades using technology. Every quant investor is looking for an edge, so we’ll explain how these elements are used to capture edge.
| December 28, 2015
- One Bad Line of Code Will Destroy the Fund
In 2012, Knight Capital Group, one of the largest market-makers in the industry, lost $440m in 30 minutes due to a glitch in their trading system. As CIO Magazine put it, “If that bug could affect Knight, it could happen to any company.”
Strong words and a scary thought. So why is this nightmare scenario a rare occurrence at quant funds? Knight Capital traded directly on the exchange, as have most broker/dealers that experienced flash crashes or rogue trades. That means those big mistakes when straight from the firm to the trading floor with no filter.
| September 8, 2015
Shkreli trying on his new matching Tiffany’s bracelets
If infamous ‘pharma bro’ Martin Shkreli’s public statements since his arrest are any indication, he is likely to wage a trial by public opinion over the next several months.
Shkreli has already called his indictment a witch-hunt based on his much-hated move of jacking up drug prices rather than based on any legal wrongdoing. There seems to be some sympathy for this angle, and I wouldn’t be surprised to see upcoming pieces profiling his ‘introverted and misunderstood’ personality over the coming weeks. The talking heads have already begun to debate whether his unethical behavior with regarding to drug pricing merits the “response” by authorities.
| September 4, 2015
It’s natural to focus on the ‘big questions’ when interviewing a manager, and one of the most popular requests is “Tell me about your BIGGEST position.” Upon hearing this request the manager usually responds with a beautifully rehearsed story about their highest conviction idea and why it’s the perfect opportunity.
I want to thank Tom Brakke of @researchpuzzler who brought to my attention a much better question which is likely to have a much larger impact:
| September 3, 2015
Hedge fund marketing is a tricky sport, and there are some pitfalls to be aware of when meeting with investors. Here are 5 of the worst types of meetings that hedge fund managers experience and how to interpret or avoid them.
| September 3, 2015
Everyone knows that a “fund of fees” has to overcome a high bar to justify it’s expenses (typically a 1% management & 10% incentive fee) but here are several other key problems that affect most fund of funds (FoF) investors and every individual investor in hedge funds alike:
| September 1, 2015
A key question that comes up in most due-diligence meetings is the oft dreaded “what is your edge?” The answer is often the difference between an allocation and going home with nothing. From my meetings with many managers I’ve found that most answers boil down to several cliches. Be sure to avoid these common answers that will turn off an experienced hedge fund investor:
| August 24, 2015
From an investor’s perspective some of the best responses we’ve heard include:
“We’re the largest private recipient of IPO syndicate in our region.” This was from a manager who has great relationships with major banks in his region and pretty much just flips IPOs for fairly absurd returns. This is entirely a relationship edge.
| August 23, 2015
There’s a big world outside of long/short equity and plain vanilla strategies.Here are some examples:
15. Life Settlements — Several hedge funds literally invest in the life insurance claims of others, hoping they’ll die early so they can collect. The Private Placement Memorandum’s for these funds often cite ‘risks’ such as cures for cancer or heart disease, and other medical breakthroughs that could unexpectedly prolong life.
| August 17, 2015
There are several objectives to hedge fund DD (and it’s not all about making sure the manager isn’t a Madoff.) It helps to recognize from the outset that each hedge fund is first and foremost a business, and for businesses to be successful, they need to have a differentiated product, and a repeatable process for creating that product. In other words, what is the manager’s differentiating ‘edge’, what is their process for exploiting that edge, (and how does it fit into your portfolio)?
| June 24, 2015
A rogue trader is a trader who risks extreme amounts of firm capital without authorization and then loses it. (Conversely, a rogue trader who MAKES billions is called a “managing director.”) Rogue trading happens when poorly designed incentives are coupled with weak operational controls. Before getting into the risk this presents to your hedge fund investments, let’s review history.
The cornerstone of hedge fund investing is due-diligence. Over the years investors have missed blatant red flags that are obvious to experienced hedge fund investors. Apply these 8 tips to your due-diligence process to help sort through the weeds and avoid potentially fatal losses: