The Future of Hedge Fund Investing: A Regulatory and Structural Solution for a Fallen Industry (Wiley Finance)

206 Pages·2009·1.32 MB·English

by  Monty Agarwal

Praise for A $65.00 USA/$78.00 CAN
(continued from front flap)
The Future of Hedge Fund Investing g
a
(cid:127) The role of hedge funds in the 2008 market
r
crisis and what can be learned from it
w
a
(cid:127) How the experts failed and the different ap- “The Future of Hedge Fund Investing is an excellent survey of the hedge fund industry
l
proach the industry needs to adopt to avoid landscape. Monty Agarwal’s treatment of the subject serves as a thoughtful guide for How to fi x the hedge fund industry
investors in hedge funds and their managers. The book references a variety of recent
these failures as we move forward
events that are sure to shape the industry’s future. At the same time, it offers practical, T
The world will always have its Ponzi schemes
useful insights and model solutions to those who wish to successfully navigate the com- h
Given the vital role hedge funds play in the
and money managers like Bernie Madoff. But
plexities and challenges of hedge fund investing. A highly recommended read.”
global capital markets, this industry deserves e
for today’s fi nancial professional, the germane
— Sharath M. Sury, Dean’s Executive Professor of Finance, Santa Clara
to be both better understood and better run.
question raised by recent scandals is not why
University; Adjunct Professor of Economics, University of California; F
The Future of Hedge Fund Investing offers a
Director, Institute of Financial Innovation & Risk Management; and people commit crimes, but rather why the paid
u
critical yet constructive analysis of these cru- former CEO, S4 Capital Family Office experts—especially fund of funds managers—
t
cial fi nancial entities. Whether you’re a fi nancial The Future of
failed to detect investment hazards that seem so
u
professional, a potential investor, or simply an “While hedge funds fl ounder and regulators fi ddle, Monty Agarwal is the fi rst to objectively
glaring in retrospect.
interested reader, The Future of Hedge Fund diagnose the industry’s dysfunctions and provide a solid road map for its rehabilitation. r
e
This book is an absolute must for investors who got burned by hedge funds in the past
Investing gives you a clear look at the state of The Future of Hedge Fund Investing spells out,
Hedge Fund
and for anyone who wants to use hedge funds for wealth-building in the future.”
hedge funds today as well as a picture of what in refreshingly stark terms, exactly how the
o
— Martin D. Weiss, author of the New York Times bestseller,
the future may hold for them. industry let down its clients and the changes
The Ultimate Depression Survival Guide f
needed to restore their confi dence. Written by
MONTY AGARWAL worked as an interest H
Monty Agarwal, the founder of Predator Capital
“As a fund of funds manager, I found Agarwal’s ‘other-side-of-the-table’ perspective
rate and currency trader on Wall Street between
of having managed his own hedge fund to be entertaining and informative. His unique e Management, this insider’s guide gives a full
1995 and 2003. From 2003 to 2008, he was a
insight on how to approach various situations along the due diligence process in order d assessment of the business, including the ad-
Investing
portfolio manager in the hedge fund industry. to make the best investment decisions is invaluable to even the most experienced vantages of hedge funds, their pitfalls, and, most
g
Agarwal founded Predator Capital Manage- professionals in this business.”
importantly, how to avoid these missteps.
e
ment, which had $500 million under manage- —Alan Cheng, CFA, Portfolio Manager, Contego Capital Partners

ment, where he was the portfolio manager of an The coverage begins by describing the hedge
F
Asia-focused interest rate and currency market “An in-depth look at the inner workings of the hedge fund industry. Agarwal clearly fund universe, which includes funds and funds of
u
outlines some of the basic groundwork that must be done by investors interested in
strategy. Agarwal also served as a portfolio man- funds; fund regulators, major investors, and mid-
hedge funds. Filled with anecdotes and some clever analyses that expose a few of the n
ager for III Funds. He holds a bachelor’s degree dlemen; fee structures, incentives, what it takes
recent illegal schemes in the fi nancial industry, this is a must-read for any investor.” d
in computer science and engineering from the to become a successful hedge fund manager,
—Arvind Hariharan, Global Head of Commodity Hybrids, Standard Bank

University of Pennsylvania and an MBA, with a and typical investment strategies. From here,
I A Regulatory and Structural Solution for a Fallen Industry
concentration in fi nance and business econom- n Agarwal explores possible solutions and fi xes as
“This is a timely, entertaining, and thought-provoking book that challenges the prevailing
ics, from the University of Chicago Booth School investment allocation model in the hedge fund community. Agarwal uses his unique v he touches upon several important issues within
of Business. Visit www.MACMLLC.com to learn perspective as an experienced, successful trader and hedge fund manager to analyze e this fi eld, such as:
more about the services Agarwal provides to the recent hedge fund frauds and meltdowns and to suggest a new, superior methodology s Monty Agarwal
for hedge fund investing.” (cid:127) Structural changes for funds of funds in areas
hedge fund investor community.
t
—Jamie Lesher, Partner, Coronado Investments, LLC including trading, diversifi cation, risk manage-
i
Jacket Design: Loretta Leiva n ment, and due diligence
Jacket Illustration: © Alamy
g
(cid:127) Guidelines for investors to follow when inter-
viewing hedge fund managers
(cid:127) How to improve the overall due diligence process
wileyfi nance.com
(continued on back flap)
EAN: 9780470537442 ISBN: 978-0-470-53744-2
E1FFIRS 08/13/2009 12:22:46 Page6
E1FFIRS 08/13/2009 12:22:46 Page1
The Future of
Hedge Fund
Investing
E1FFIRS 08/13/2009 12:22:46 Page2
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E1FFIRS 08/13/2009 12:22:46 Page3
The Future of
Hedge Fund
Investing
A Regulatory and Structural
Solution for a Fallen Industry
MONTY AGARWAL

John Wiley & Sons, Inc.
E1FFIRS 08/13/2009 12:22:46 Page4
Copyright#2009byMontyAgarwal.Allrightsreserved.
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LibraryofCongressCataloging-in-PublicationData:
Agarwal,Monty,1968–
Thefutureofhedgefundinvesting:aregulatoryandstructuralsolutionforafallenindustry/
MontyAgarwal.
p.cm.–(Wileyfinanceseries)
Includesbibliographicalreferencesandindex.
ISBN978-0-470-53744-2(cloth)
1. Hedgefunds. I. Title.
HG4530.A382009
332.640524–dc22
2009023576
PrintedintheUnitedStatesofAmerica
10987654321
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Dedicatedtomychildren,KieranandMeghan.
Maytheygrowuptobecomewiseinvestors.
E1FFIRS 08/13/2009 12:22:46 Page6
E1FTOC 08/18/2009 11:5:45 Page7
Contents
Foreword xiii
Introduction xv
CHAPTER1
RecentHedgeFundScandals 1
PalmBeach,Florida 1
KLFinancial,March2005 2
Ritzy Palm Beach Offices: Looking the Part 3
Ronald Kochman: The Facilitator 4
The Duping and the Post Mortem 4
AmaranthAdvisors,September2006 6
Outgrowing Its Core Competency 7
Brian Hunter 7
Risk Management Failure 8
BernieMadoff,December2008 9
Bernie the Broker Overnight Becomes a
Derivatives Trader 10
Palm Beach Connection and Robert Jaffe 12
Conclusion: Failure of the So-Called Experts:
The Funds of Funds 13

Split Strike Convergence 14
The Mystery of the Missing $65 Billion 15
Lesson1:RelationshipsDoNotTrumpDueDiligence 18
Lesson2:WhenInvestinginHedgeFunds,HireExperts 18
Lesson3:‘‘WeDidNotKnowWhatWeWere
InvestingIn’’IsNotAnExcuse 19
Conclusion:SoCalledExperts,FundsofFunds,
HaveFailed 19
vii
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viii CONTENTS
CHAPTER2
ThePlayers 21
FlowofCapitalintheHedgeFundIndustry 22
Pension Funds 22
High Net Worth Individuals (HNWs) 24
Banks 26
Endowments 28
Conclusion 30
CHAPTER3
HedgeFunds 31
IncentivesandtheDisincentivesoftheHedge
FundFeeStructure 32
EducationoftheFutureHedgeFundManager 35
Jim Simons, Renaissance Technologies
(A $34 billion hedge fund) 35
TrainingGroundsoftheHedgeFundManager 36
TheChartReaders 37
TheQuants 37
TheGlobalMacroTrader 38
FromaCaterpillartoaButterfly 39
Skills of a Trader 40
Personality of a Trader 42
AndrewLahde’sGoodbyeLetter 42
CHAPTER4
HedgeFundStrategies 45
Long-ShortEquity 46
EventDriven 47

GlobalMacro 49
Fixed-IncomeArbitrage 50
RelativeValueArbitrage 51
Effectof2008ontheseStrategiesandLookingForward 53
CHAPTER5
HedgeFundServiceProvidersandRegulators 57
BuildingaBusiness 57
Lawyers 58
The Offering Memorandum: Caveat Emptor 59