Advice for new investors who are looking to allocate capital to hedge funds
I realize that most of the people on this forum are on the sell side, they run or work at hedge funds. Coming from the other side, someone like myself who is looking to invest some money in hedge funds, where is a good place to start finding top performing funds? A Google search of "top performing hedge funds of 2016" returns many different lists, top 10's, top 100's etc. What would be the harm in investing say, $100k in the top fund in each strategy (e.g. value, statistical arb, long/shot, global, fixed income)? I want a fairly passive approach to grow wealth without lumping it all in my 401(k) and into mutual funds.
I would love to hear from anyone who can give me advice on choosing a hedge fund. Obviously no-one can predict future performance, but are there any red flags to look out for? The last thing I want is to lose 40-50% of my capital because of a market correction or an over-leveraged fund. I want to be diversified and capital preservation is one of my focuses. Obviously interest rates from savings, money market, CDs etc is almost zero so that is not an option.
Thanks.
couple things:
reason I ask is hedge funds (very few anyway) just take anyone off the street unless the commitment is large (like 8 figures large). the way to get in is via a broker like Morgan Stanley, JP Morgan, Citi, or Goldman. there are others out there but those firms have the best hedge fund platforms, with MS being the biggest, Goldman a close 2nd.
if you're not worth at least $1mm, too bad, you can't invest in hedge funds (not even funds of funds), because you have to be an accredited investor AT LEAST. most of the good funds require a $5mm net worth (exclusive of primary residence).
also, if you're not willing to put up at least $500k or more, fugeddaboudit. if the fund has a $1mm minimum net worth, you'll need 50-150k just to get in the door. if $5mm minimum net worth, 250-500k minimum purchase.
finally, most of the best funds are closed to new investors (meaning they only take add'l capital from existing investors), so your best way to get exposure is through a fund of funds.
sorry to burst your bubble brah
Thanks for the bubble burst. That sucks. Really liked some of the numbers that I was seeing. Maybe I can find some funds that will let me start with a $50-100k investment.
you'll have to start working with a broker at one of the aforementioned firms. also, I just checked my platform and the vast majority of funds require a $5mm net worth. fund of funds usually only require $1mm net worth.
here's what I'd do. if you really want hedge fund exposure, wait. yes, you can buy some fund of funds, but there are other opportunities available to you through separately managed accounts at some of the major brokerage firms. SMAs are more tax efficient and afford you advantages over mutual funds. again, you'll have to get these through a broker, but you can still grow your money while avoiding mutual funds
Just try liquid alts to start out with, which will also help you pick a strategy you like and are comfortable with. Then in a few years you can call up some "real" HFs
Give it all to Renaissance. If that was actually an option for you, that would be my recommendation.
On a serious note, I would assume that investing in HFs is a similar strategy as your old fashion equity portfolio. Divide and conquer, spread your capital across strategies to spread your risk - just as you pointed out (value/arb/distressed/etc).
Additionally, I would look into the PM and/or Fund Manager's track record. Not only for performance, but if there have been any murmurs of insider trading that's a red flag.
Right now may be an ideal time to buy into some of the larger flagship funds mainly due to the HF industry performance this year. For example, Bridgewater's flagship fund was down 12% from Jan --> July. HFs may be looking for inflows because a lot have experiences significant withdrawals (Pershing, Bridgewater to name a few).
To some degree, if the HF industry does bounce back to its post-2008 glory then buying flagship funds right now would be at a discount. Similar to if you bought Amazon around 9:30am EST the morning of Brexit.
....or if you shorted Nintendo a few weeks ago....as I predicted ;)
EDIT
Disclaimer: I do not work in the HF industry Disclaimer #2: My advice above is based on the assumption that you have the net worth, capital, and access to buy in to some of these companies/funds/etc.
Thanks for your reply. I have only just started looking at funds, but as the brofessor pointed out above, I may not qualify to invest in any, if not the best ones. And the best ones are closed to new capital.
I just want to start out getting my feet wet, and put some of this cash to work. I want minimum 6% PA return and very low beta. If I could hit any of those HF numbers like 15-20% PA I would be more than set for life.
at a level of 1mm, most likely you will be put into a robo-advisor type account...which is not ideal. I suggest checking out http://www.marketinflections.com/options-alert-service/
This is one of the better performing signals service, is very cheap for the performance, and since it is just buying options, is safer than other services.
I've been trading options for 10 years. Buying options is a sure fire way to lose money, I know I've done it first hand. Selling spreads, condors, butterflies, covered calls etc. is a much more consistent income earner.
Thanks for the link though, I'll check it out.
the best way to make a small fortune in options is to start with a large fortune.
^^^ Gold right here.
i am not employed by, nor do i have any personal or financial interest in the guys over at MarketInflections.com
However, i have been a subscriber to their signals service, and indeed have reaped over 30% return per year...its pretty easy since you don't have to watch the markets...just do trades when they send out the emails.
I'm amazed they have not started a hedge fund...i suspect that in the near future they will.
They offer a 14-day free trial...it costs you nothing to try out their signals...
thebrofessor thoughts on liquid alts for a situation like this?
Very few good ones for growth, most of what's out there is low vol diversifiers, exceptions are aqr and gotham
So one high level overview of the HF industry at the moment is how many of these funds are unable to produce the returns they once were. I work for a FOHF ans realise this to be true, for obvious reasons. $100k is too small and you would need at absolute minimum $500k to invest in many funds, with the majority being $1mm. When meeting hedge funds it's good to get a general understanding of their strategy and risk management. I have talked to some funds who simply did not believe in Brexit and were killed for it.
Look into AQR, Zimmer partners funds, TCI ( the children investment) as starting points. Systematic funds are doing very well at the moment, and will continue to do so.
Oh look into UCITs funds if you want to invest less money!!!
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