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Alternative Market Briefing

Other Voices: How not to invest in hedge funds (1)

Wednesday, March 31, 2010

Written by Bryan Goh of London-based fund manager First Avenue Partners LLP.

We all know what to look out for when contemplating a hedge fund investment.

- Independent administrators and independent valuation of assets and calculation of fund NAV. - Independent prime broker, reputable auditors and legal counsel. - Independent board of directors consisting of seasoned industry professionals - Rigorous processes, documented and inculcated throughout the team. - Independent risk management with a risk manager who can override the trader or portfolio manager. - Manager must invest a substantial portion of wealth in the fund. - Strong track record - Reference well - Etc - Etc

The list of criteria is endless, sometimes controversial, and sometimes even self contradictory.

This is NOT how to invest in hedge funds. It is a particularly poor way of investing in hedge funds, or any funds, or making decisions in general. Particularly in a field as complex as alternative investments, a process driven, checklist approach to investing, leads to mediocrity.

How To Invest In Hedge Funds:

Understand the Risks One cannot manage in ignorance. Understanding risk involves understanding the operational risks, fraud risks, regulatory risks, liquidity risks, market risks, funding risks, political risks, manager risk. It involves understanding which risks are acceptable and which are not.

Risk ......................

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