Do you argue for or against investing in Hedge Funds and why?

What are the arguments for investing in a Hedge Fund and why?

What are the arguments for not investing in a Hedge Fund and why?



Where do the hedge fund get high returns from? ( excessive speculation and large risk?)

How is large risk managed? Are Hedge Funds Dangerous why and why not?


Lets have an honest discussion about some of these current topics we are facing today!

any takers?

Well I guess I'll have this conversation with myself:

But it seems I have lots more to think about with todays discussion of whether or not you should invest in a hedge fund.

Some topics that came up:

1. Why trust young inexperienced people
2. Why invest in a fund when you can get similar returns else where
3. Are HF's simply set up "to milk" clients
4. The availability of capital
5. are performance fee's free leverage?




Some thoughts to these topics:


Why Trust Young inexperienced people?

A fund successful fund manger will know if another fund manager got what it takes to make it. Having certain characteristics or being endowed with what it takes is part of this. Youth means higher potential learning curve than someone older say from sell side or buy side coming into the game late. Ability to learn faster and adapt to the new changes certainly is good. Arguably older cats got some tricks to the trade from their previous experience but still also have a lot to learn. Potential returns are arguably higher in the future as well.

Young talent, if well endowed with what it takes, can minimize this handicap through a strong advisory board or through a good team of board members across various industries related to Hedge Funds. These board members can be of well experienced and highly knowledgable in the field. Thus the talent runs and learns along the way with the guidance of the "elder Council" . LIke wise, young talent is enhance if an institutional partner comes along to help give the necessary support in terms of anything such as, third party administration, risk assessments, access to research, advice, legal issues, connections etc….

To write young people off as not knowing what they are doing completely is a big fallacy of older generation thought. There are ways to innovate around the problems that youth can present in at the same time, there are ways to innovate around the problems old age can bring. Young and old can complement each other just as the Yin and the Yang.

Why Invest in a Hedge Fund when you can get similar returns elsewhere?

2. HF in this day in age can argue many different things to this point. Sure you can get similar returns else where but its the quality the product that you are buying into. Perhaps this is not the best example but maybe it will work for now. Why buy a coat from a high end store such as Burberry instead of forever 21 (assuming you can afford both easily)?

I remember going into a burberry store buying a VERY small gift for a friend. The way you are treated, the service provided, the attention and the detail of the sales staff, the quality of the product, the atmosphere, etc…. all very pleasing and aesthetic. Go into forever 21 you have to deal with a busy staff (who may or may not be willing to help), digging through racks of cloths to find your size and what oyu want, elbow to elbow with your fellow brethren. Ok I exaggerate the experience in forever 21 as I never really go there, but this is to exemplify the point. You are buying into the "service" when in a high end store and that is why people go to places for one example. Not only the service but the quality of the item you bought is very high too.


Now the hard part… to parallel this to HF service and say an ETF that give the same returns (or are both doing the job a coat would do). Services that HF’s can provide are the special market insights within the strategy it is focusing on, or sector that the HF invests in. IT also gives differing and vary exposures due to these strategies, can give varying forms of beta, alternative beta, alpha, alpha/beta beta/alpha... and which ever combo you investors are looking for these days. The HF managers if surviving for many years are probably doing something right to survive and have strong insights and can provide definitive answers vs. passively investing. Because of this high knowledge, certain risk managements can be accounted for. For example, an energy HF can hedge against falling oil while an ETF would just take a nose dive. There are protection measures offered. IF this is the same annual return you may ask why does this matter? Well because holding periods are important i say! you don’t buy in at the start of the year and sell at the end, or at the start of a month and at the end... some may do but these time frames can vary, and so though in the end, the annual return maybe the same, the interim returns may or may not be. A solid consistent manager can provide a less volatile portfolio then a passive vehicle alone in certain time frames. This provides more dynamic flexibility for clientele where as an investor maybe stuck waiting on an ETF to return to a certain price point to get out.

Basically:
Quality service providing market edge insights
dynamic flexibility of returns
and allowing different portfolio exposures

are some of the many reasons it may be worth considering investing in a HF instead of a do it yourself product, that is often stuffed with exotic derivatives that even the makers themselves are not aware of what kind of exposures and risks the product offers.

Are Hedge Funds Setup to Milk Clients?

Recently, I’ve been learning of the sell side mentality that clients are cows that you can milk them for all their money. Now of course its would be harsh to generalize this across the board, but this often a common practice on sell side and even in buy side activities. Things such as front running clients, using clientele data for trading benefits etc... or for buy side to sit on billions of dollars and do little work to provide good service while taking big management fees is just as bad. Of course these practices are wrong, and amoral, but as I explained above, if you provide products and services (be it knowledge, insights, returns, profits etc...) that your clientele are happy with you are not milking clients at all. Of course the recent influx of sell side guys to buy side institutions may bring more of this destructive mentality, but investors are not stupid and will learn fast when they are not getting what they want. Post 2008 crises the investors that are left and sticking around definitely have buffed up and are doing more due diligence and self risk management in terms of their investments. It would be unwise to to think investors are sheep getting ready for your slaughter.

The availability of Capital:

My view is that there are willing and ready people who want to buy in the HF industry, of course everyone is competing for the same bread, but that competition will weed out who will survive and who will not. However, being weighed down in the face of such competition means you have already lost the war... forget the battle.

The example I use is how often you may find wealthy affluent people basking in their opulence and grandeur willing to spend frivolously (I’m not saying all people do this). Money is out there, and its a matter of getting a small slice of it. My point is that money, often lazy money, is “sloshing around” out there and not being put to use.

I recently met up with a contact in Malaysia and he pointed out that Malaysia is a VERY resource rich country and because of that, there is lots of money “sloshing” around. There were underlying factors why the money was not being put to use, but I will put those reasons aside for now. The point is, money if gained through hard work or even if it is money accumulated by smart people can be lazy money “sloshing” around. This money if gotten a hold of can be put to work and provide good returns for people willing to invest. And in fact, that was what was happening, tons of capital outflows from Malaysia into hard working Singapore was the trend.

People spending lots of money was just alluding to that there is money out there that can be put to use if gotten a hold of. Not having anything to do with milking clients (see #2 and #3 above).


You need clients for free leverage or for running.

5. Obviously economies of scales benefits both the investor and the fund manager. It is not “free” leverage if the HF is providing a good service and the investor gets the returns or exposures/volatility/strategies they seek. See number 2 and 3 again as well. Again, we assume we are not employing amoral business models of milking clients. Running worked well for older IB banking models, but wont’ work in the long run in the HF industry.

Snapman wrote:

Some topics that came up:

1. Why trust young inexperienced people
2. Why invest in a fund when you can get similar returns else where
3. Are HF's simply set up "to milk" clients
4. The availability of capital
5. are performance fee's free leverage?

In this thread I will play the advocate of the devil and as requested in our discussions, I'll be merciless
You guys have to bullet proof against the arguments that can be thrown against you

For today : Why trust young inexperienced people

When it comes to Investing in a managed fund, I personally only delegate the task of investing MY money to granny asset managers with decades of experience and an outstanding track record. First I know that they have an army of traders to get them the best execution, an army of analysts, access to the best research and to be honest I believe they get a lot of inside information and the more time one spend in the industry the more access to inside information one gets : they are well connected and stock pickers have lunch with the executives of the companies they invest in, global macro players have connection in central banks etc , the brokers they've been working with for years tell them where the stops are etc etc. But most of all, they have already paid their due to the market. They have spent years or decades in front of the screens and lost huge amounts of money: other guys money not mine and that's the point. If I were to invest in a fund run by young and inexperienced guys, I would not want them to pay for their tuition fee with MY money. The trading game is a game you spend years and years to understand, and it's not because you've spent years in the game that you've understood it but one thing is sure : a young guy without experience still has to pay his dues.

As entrepreneurs, young people have a edge : they have health and have the energy to work day and night. Correct. But I would say the granny managers in huge funds hire an army of young, dedicated and healthy guys working for them and sleep while the others work. The other thing is a selective industry like the HF one, reputed to be where the big money is, attracts the best young talents, and whatever your level of determination, health, skills, education, your ability to work hard etc is you will ALWAYS find a guy more skilled, working harder, healthier, more educated, really extraordinary guys and younger than you. Now how to convince an investor, even if it's true, that you're more serious, more whatever you want that the other extraordinary guy who graduated from Harvard, speaks 10 languages, runs the 100 meters in 10 seconds and has been following the market since he was 5 ... I'm not kidding that much, I've interviewed hundreds of young guys during the golden age of IB, some are really really extraordinary. I can remember for instance a guy who served as a jet fighter pilot, used to be a male model who was applying for a trader's job after an outstanding education... I mean being young and determined is not a valid argument as a lot of people can argue it.

Now I've seen a lot of young guys who one day decide that they will make money from trading, read a few books in the best case, none in the worst, borrow some money and trade... Needless to say that they go broke pretty quickly and end up finding another cheaper hobby. I know, you guys, are not like those, far from it, but that's the cliche that comes to me when I think about young and inexperienced traders and I'm sure I'm not the only one, but you will have to prove it.

Trading is not a sport and the youth is not necessarily a edge, as a general rule of thumb, it's like wine, the older the better

That's it for today!