I enjoyed reading Richard Wilson's The Hedge Fund Book (Richard also runs the Hedge Fund Blogger site). To travel clear: it is purely marketing-oriented. It doesn't nation you lot how to discovery a successful trading strategy, but its focus is to nation you lot how to marketplace your fund to investors i time you lot accept a successful strategy. To that end, it does a pretty skilful chore inwards conveying what powerfulness travel conventional wisdom to seasoned fund managers. (For e.g., don't bother to marketplace to institutional investors if your AUM is less than $100M.) The majority is filled amongst quite engaging interviews amongst fund managers, fund marketers, as well as other fund service providers (including our really ain administrator Fund Associates). If Scott Patterson's The Quants is most the gods of hedge funds, this majority is for as well as most the mortals.
One paragraph inwards the majority stood out: "I've worked closely on the third-party marketing as well as uppercase introduction/prime brokerage side of the business, as well as I oft meet both types of firms deny clients service [to funds amongst high returns as well as high risk] ... Nobody wants to travel associated amongst a director aiming at thirty percentage a calendar month returns."
Maybe non aiming at, but what's incorrect amongst achieving a thirty percentage a calendar month returns? I accept genuinely met institutional investors who don't wishing to await at a fund that genuinely achieved double-digit monthly returns. Presumably that's because they believe that a high render automatically implies high risk, as well as also presumably a high leverage every bit well. I would debate that at that topographic point are two reasons non to completely dismiss such funds out-of-hand:
1) Leverage should non travel determined arbitrarily, but should travel based on the minimum of what's dictated past times half-Kelly (see my extensive discussions of Kelly formula on this weblog as well as inwards my book) as well as what's dictated past times the maximum single-day drawdown seen historically or inwards VaR simulations. And if this minimum nonetheless turns out to travel higher than what most institutional investors are comfortable with, i should travel bold plenty to adopt it inwards your fund.
2) As an investor, at that topographic point is an slow mode to command leverage as well as risk: simply apply Constant Proportion Portfolio Insurance (a concept also discussed elsewhere on this blog). For example, if the fund director tells you lot the fund employs a constant 10x leverage (as dictated past times the run a endangerment analysis outlined inwards 1) as well as you lot are entirely comfortable amongst 5x leverage, simply invest one-half your uppercase into the fund, as well as proceed the other one-half every bit cash inwards your banking concern account! Going forward, if the fund loses money, your effective leverage would accept decreased to below 5x. Say you lot invested $1M into the fund, as well as kept $1M inwards the bank. And nation the fund lost $0.5M. Your full equity is at nowadays $1.5M, as well as the fund director is supposed to merchandise a $0.5M*10=$5M portfolio. Your effective leverage is at nowadays entirely 3.33x, good inside your tolerance. Now if instead, the fund made money, you lot tin give notice directly take roughly of the profits to proceed your effective leverage at 5x. So, nation the fund made $0.5M. Your equity is at nowadays $2.5M, as well as the fund director is supposed to merchandise a $1.5M*10=$15M portfolio. If you lot don't withdraw, this would growth your effective leverage to 6x. But if you lot directly take $0.25M, as well as then the fund director volition merchandise a $1.25M*10=$12.5M portfolio, giving you lot an effective leverage of the desired 5x.
If you lot are an investor inwards hedge funds, delight allow us know what you lot intend of this system inwards the comments section!
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