5 Ways Bad Hedge Fund Legal Counsel Hurts Their Clients (and Investors)

Nathan Anderson | June 23, 2016

hedge fund, legal counsel, complianceDisclaimer: 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.

Quant Hedge Funds are Not as Opaque as Everyone Thinks They Are

Nathan Anderson | May 23, 2016

Are You Holding Out On Me?

quant, hedge fund, process, transparencyInvestors 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.

15 Fascinating Quantitative Hedge Fund Strategies

Nathan Anderson | April 28, 2016

Businessman tries to solve problems

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.

5 Misconceptions About Quantitative Hedge Funds

Nathan Anderson | April 26, 2016
  1. One Bad Line of Code Will Destroy the Fund

quantitative, hedge fund, due-diligence, transparency, fat finger, glitch, errorIn 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.

How Hedge Fund Valuation Agents Often Do More Harm than Good

Nathan Anderson | April 25, 2016

trojan-horse-woodcutOften thought to be a source of comfort, we’ve found that an independent hedge fund valuation consultant can actually be a red flag. A third-party valuation is only needed when observable market pricing isn’t available, so right off the bat it signals that the fund is dealing with some off-the-run investments that require additional scrutiny. In my experience, frauds and shady actors will often hire rubber-stamp artists masquerading as valuation agents as a way to give investors a false sense of security with their questionable marks. 

The Story of How Shkreli’s Hated Move Almost Saved Him

Nathan Anderson | December 28, 2015
due-diligence, hedge fund, ponzi, shkreli

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.

Hedge Fund Due-Diligence: 1 Killer Question That Investors Rarely Ask

Nathan Anderson | September 8, 2015

strong ant hedge fund questionIt’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:

The 5 Worst Types of Hedge Fund Investor

Nathan Anderson | September 4, 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.

6 Hedge Fund ‘Arbitrage’ Strategies that Aren’t Really Arbitrage

Aaron Rabinowe | September 3, 2015

hedge fund arbitrage strategiesHow often do you encounter a perfectly good product that is advertised as something it’s not? RedBull doesn’t actually give you wings and Axe Body Spray doesn’t make women break into your house. What these advertisement methods share is appeal to their target audience.

The academic definition of ‘arbitrage’ is a method of making money on price differentials where a risk-free profit can be earned.

Top 7 Hedge Fund ‘Edges’ That Aren’t Actually Edges

Nathan Anderson | September 3, 2015

baby-tigerA 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:

15 Weird Hedge Fund Strategies That Investors Should Know About

Nathan Anderson | August 24, 2015

sheepThere’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.

How to Perform Hedge Fund Due-Diligence Like a Pro

Nathan Anderson | August 23, 2015

sherlockThere 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)?

Hedge Fund Investors Are Funding Rogue Traders

Nathan Anderson | August 17, 2015

rogue-traderA 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.