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Nov 30

My Least Favourite Hedge Funds

I’m always being approached by fund managers pitching their latest or greatest fund and many of them appear quite good with impressive people, performance, and/or process. Every now and then I see a fund that to me makes little sense and the latest to annoy me is the generic Asian Fund of Hedge Fund…I haven’t named the actual manager as there is quite a few managers doing them.

My reason behind my dislike goes like this…these funds are selling two attributes…1) they are focused on Asia and it’s expected strong economic growth which is expected to generate strong returns, and 2) the absolute return focus of the underlying funds and therefore their combination. I view the combination of these attributes as a little contradictory.

If I want an absolute return focused fund of hedge fund, I do not want to restrict my selection to one region. If there is a skillful manager based or investing in Ireland or Greece or US with a successful absolute return focus why should my fund ignore that potential?

Having a geographic focus is a beta (market) play whilst hedge funds are an alpha (skill) play…they shouldn’t be used to confuse or for marketing purposes just because naive investors will fall for it. If you are a fund of hedge fund keep it local for tax reasons or go global to increase your opportunity set. If you want to invest in a region, you are typically wanting to do so because you believe markets are going to go up… so do yourself a favour and buy a cheap index fund or long only managed fund that is region focused and save yourself some fees and increased risk.

Combining the two actually increases your risks of not achieving your desired outcome which can be achieved more efficiently with a global fund of hedge fund and a long only Asian fund combined to provide an acceptable level of risk.

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