The Hedge Fund Book: A Training Manual for Professionals and Capital-Raising Executives

194 Pages·2010·2.266 MB·English

by  Richard C. Wilson(auth.)

Additional Praise for The Hedge Fund Book
“Those new to the hedge fund industry will benefit immensely from the
chapterdevotedtoansweringfrequentlyaskedquestionabouthedgefunds
as well as the easy-to-understand explanations of all major areas of hedge
funds throughout the book. Experienced hedge fund professionals reading
this book will also gain valuable insight from other managers and service
providers on current issues facing hedge funds. Whether you are looking
to raise more capital, improve your fund’s operations and due diligence,
launch a new hedge fund, or just learn more about hedge funds, this book
isamust-read.”
—TheoO’Brien,Associate,PrivateEquityInvestmentGroup
“Richard’s new book is a terrific testament to the knowledge that he and
histeamhaveofthehedge fundindustry.Fromnovicetoexperthedgers,I
recommendthistrainingmanual.Itsinformationmakesforasharp,timely
evaluationofwherehedgefundsareandwheretheyarelikelytobeheading.”
—ThomasJ.Powell,CEO,ELPCapitalAdvisers,Inc;Author,Standingin
theRain:Understanding,SurvivingandThrivingintheWorstFinancial
StormsincetheGreatDepression.
“RichardWilsonisthebestsinglesourceforpracticalanswersonthehedge
fundindustry.Forpeoplenewtotheindustryorconsideringlaunchingtheir
ownfund,looknofurther.You’llfinditallhere.”
—RichardZahm,PortfolioManager,SecondAngelFundI
“This book caters to hedge fund aspirants as well as finance professionals.
Richard does a wonderful job of demystifying any misconceptions that the
hedgefundindustryfacestoday.Throughacombinationofinterviewswith
industry professionals, a top down approach to both the basic and more
complex nuances of running a hedge fund and colorful examples of the
industry,Richardhasbeenabletoachievewhatsomanyotherhedgefund
booksaspireto.Tocapturethereaderinbothanenjoyableandinformative
bookthatwillsoonbecomeastandardinthefinanceeducationindustry.”
—CurtisBirchall,LongbowCapital,Inc.
“The Hedge Fund Book provides an “inside baseball” look at the hedge
fund industry and should be required reading for someone looking to get
intothebusiness.”
—ScottFreund,SeniorFamilyWealthAdvisor,GCCFamily
WealthManagement
“Iwishthisbookhadbeenaroundwhenwegotstarted.Thispieceacceler-
atestherampingupperiodforhedgefundmanagementcompanyfounders
andexecutives.Mostpeoplethinkthattohaveahedgefundallyouneedis
agoodtraderandaBloombergterminal.Theyareshockedwhentheylearn
what it really takes to be successful. This book does a phenomenal job of
explainingandexploringthesekeystosuccess.”
—PratikSharma,HedgeFundManager
“The Hedge Fund Book is one of the few books that specifically address
the “business” of hedge funds. Make no mistake, running a hedge fund
is a business just like any brick and mortar store that requires attention
to operations, sales and marketing, compliance, etc. as well as investment
returns.Nowmorethenever,institutionalinvestorsareplacinganemphasis
on back/middle office functions. The Hedge Fund Book offers practical
insightandadvicefromseasonedprofessionalsontheseoverlookedaspects
ofahedgefundbusiness.”
—NakulNayyar,U.S.Long/ShortHedgeFundTrader
“The Hedge Fund Book: A Training Manual for Professional and Capital
Raising Executives by Richard Wilson is an excellent guide for established
anddevelopinghedgefundmanagers,andcanbeusedasapointofreference
intheadministrationofbestpracticesofhedgefundsandinvestorrelations.”
—ValerieEmanuel,President,ValerieEmanuel&Associates
The Hedge
Fund Book
A Training Manual
for Professionals and
Capital-Raising Executives
RICHARD C. WILSON
John Wiley & Sons, Inc.
Copyright(cid:2)C 2010byRichardC.Wilson.Allrightsreserved.
PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey.
PublishedsimultaneouslyinCanada.
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LibraryofCongressCataloging-in-PublicationData:
Wilson,RichardC.
Thehedgefundbook:atrainingmanualforprofessionalsandcapital-raisingexecutives/
RichardWilson.
p.cm.–(Wileyfinanceseries)
Includesindex.
ISBN978-0-470-52063-5(cloth)
1.Hedgefunds. I.Title.
HG4530.W5462010
332.64(cid:3)524–dc22
2010003434
PrintedintheUnitedStatesofAmerica.
10 9 8 7 6 5 4 3 2 1
This book is dedicated to my wife, Adriana Wilson, for being
a wonderful person and a constant balancing force in my life.
Despite my passion for business and marketing, the Brazilian
in her makes sure that on some level I work
to live and not live to work.
Contents
Preface xi
MyStory xii
DisclosureofFinancialInterests xiii
Acknowledgments xv
Introduction 1
CHAPTER1
HedgeFundFundamentals 5
HedgeFundMechanicsandStatistics 6
HistoryofHedgeFunds 8
MediaPortrayalofHedgeFunds 9
HedgeFundEcosystem 10
FutureoftheHedgeFundIndustry 13
ChapterSummary 13
ReviewQuestions 14
CHAPTER2
InstitutionalizationandOperations 17
StephenAbrahams,VicePresidentofMarketingfora
London-BasedHedgeFund 18
BobPardo,CEOandPresident,PardoCapitalLimited 19
VinodPaul,ManagingDirectorofServiceandBusiness
Development,EzeCastleIntegration 21
NakulNayyar,QuantitativeTrading/Support,QuadCapital 24
HendrikKlein,CEO,DaVinciInvestLtd. 26
SheriKanesaka,Associate,Michelman&Robinson,LLP 29
EricWarshal,CEO,FundAssociates 30
LanceBarakerandWilliamKatts,SeniorManaging
Directors,TradeStationPrime 32
ChapterSummary 36
ReviewQuestions 36
vii
viii CONTENTS
CHAPTER3
HedgeFundMarketingPro 39
BadNews 40
PublicRelationsManagement 41
EducationalMarketing 42
ForgetaboutContactingMoreInvestors 43
E-MailMarketingBestPractices 45
CopyWriting 49
CaseProfile 50
StephenAbrahams,VicePresidentofMarketingfora
London-BasedHedgeFund 54
PratikSharma,ManagingDirector,AtyantCapital 55
HendrikKlein,CEO,DaVinciInvestLtd. 59
ChapterSummary 60
ReviewQuestions 61
CHAPTER4
TheShootingStar 63
18LessonsfromShootingStarHedgeFunds 63
RickNummi,PartnerandGeneralCounsel,
AccountingandComplianceInternational(ACI) 65
ThomasPowell,ChiefExecutiveOfficer,ELPCapital 72
ChapterSummary 74
ReviewQuestions 74
CHAPTER5
HedgeFundStart-UpGuru 77
TopFiveTipsforStartingaHedgeFund 78
HedgeFundPitchBookCreation 80
SyedAli,CEO,SaturnPartners,LLC 81
NakulNayyar,QuantitativeTrading/Support,QuadCapital 86
ChapterSummary 89
ReviewQuestions 90
CHAPTER6
DedicatedtoDueDiligence 93
ScottFreund,President,GCCFamilyWealthManagement 94
BrianReich,PresidentandFounder,AtratoAdvisorsLLC 95
RichardWilson,HedgeFundGroup,CHP
Designation,HedgeFundBlogger.com 98
DueDiligenceEffectsonHedgeFunds 102
Contents ix
ChapterSummary 105
ReviewQuestions 106
CHAPTER7
GiantHedgeFunds 109
BestPracticesfrom$1Billion-PlusHedgeFunds 109
RichardZahm,PortfolioManager,SecondAngelFund 111
ScottCohen,PresidentandCEO,HedgeSolutions 117
ChapterSummary 119
ReviewQuestions 120
CHAPTER8
GovernanceBestPractices 123
AndrewMain,ManagingPartner,StrattonStreet
CapitalLLP 124
DavidR.Koenig,CEOoftheGovernanceFund,LLC 130
ChapterSummary 134
ReviewQuestions 134
CHAPTER9
FrequentlyAskedHedgeFundQuestions 137
HedgeFunds101 137
HedgeFundOperations 139
HedgeFundMarketingandSales 142
HedgeFundCareers 156
APPENDIXA
Bonusesof$1,779 169
APPENDIXB
ExampleDueDiligenceQuestions 171
Questionnaire 171
APPENDIXC
TopHedgeFundWebSites 177
Glossary 179
AbouttheAuthor 185
Index 187
ContacttheAuthor 191
Preface
T
his book was created as a training manual for professionals who work
inthehedgefundindustryorwhowouldliketoworkmorecloselywith
hedgefundsasclientsorbusinesspartners.OverthepastsevenyearsIhave
readmostofthehedgefundbooksthatareavailable.Therearegreatbooks
on hedge fund investment strategies, the history of hedge funds, financial
modeling, and risk management. I never could find a book, though, that
provided unfiltered advice, insights, and hard lessons learned from hedge
fund managers. This gap in the marketplace and the growing needs of our
CertifiedHedgeFundProfessional(CHP)Designationprogramiswhatled
tothisbookbeingcreated.
Withinthisbook,Ihopethateveryreaderwilllearn:
(cid:2) Howhedgefundmanagersofanyhedgefundmayincreasetheiroper-
ationaleffectivenessimmediately.
(cid:2) Whymosthedgefundmanagersstruggletoraisecapital,andhowbeing
proactivewithintherightareascanallowasmallteamtoraisealarge
amountofcapital.
(cid:2) Howtoimplementgovernancebestpracticesthatwillimproveinvestor
confidence,enhancedecision-makingprocesses,anddecreasetheriskof
sometypesoffraud.
(cid:2) Howtoemulatethebestpractices of$1billion-plusgiant hedge funds
thathavelearnedmanylessonsthehardway.
(cid:2) Whywhatyoureadabouthedgefundsinthegeneralmediaisoff-base
80percentofthetime.
(cid:2) Howtodoubletheeffectivenessofyourcapital-raisingeffortsbyfocus-
ingonyouruniqueprocessandpositioningmorethanonyournumbers.
(cid:2) Howsmalltomedium-sizehedgefundsintherealworldareimproving
their business structure and processes without spending millions on
infrastructure.
The intended audience for this book includes CHP Designation par-
ticipants, hedge fund managers, professors, traders, third-party marketers,
students, service providers, investors, and consultants. The book provides
xi
xii PREFACE
a fundamental understanding of how hedge funds operate at a high level,
while also taking the reader down to very granular, real-world steps that
hedge fund managers can take to improve how they manage risk, operate,
select service providers, govern their own organization, and raise capital.
Thistextshouldhelpreadersshortcuttheprocessofinterviewing30hedge
fundmanagersandveterans,byprovidingtheiradvice,tips,strategies,and
painful lessons learned here within one concise book. If you add up all
the time of the managers and consultants who were involved within these
interviews, the book contains over $80,500 worth of advice yet costs less
than$75.
In addition to the chapters of the book that focus on niche subjects
suchasinstitutionalization,capitalraising,governance,orbestpracticesof
$1 billion-plus hedge funds, this book contains multimedia resources that
shouldhelpthereadercomprehendandabsorbtheadviceprovidedherein.
We have created over 50 video and audio resources, which you will see
referenced through this book. These may be used to supplement university
courselectures orsenttoteam memberswhomayalsowanttolearnmore
abouthedgefundsandhowtheyoperate.Toaccesstheseresources,please
visitHedgeFundTraining.com.
MY STORY
Toprovidesomebackgroundastowhythisbookwaswritten,here’sashort
explanationofhowIenteredthehedgefundindustry.Myfirstexperiencein
workingwithhedgefundswasin2001whenIcompletedaninternshipfor
acurrency/commodity-basedhedgefundinEurope.Ihelpedthemcomplete
leading-indicator trading research on the currencies and commodities of
Japan,NewZealand,andAustraliaandanalyzedtherelationshipsbetween
them.
After completing this work, I started learning more about marketing
andsalesandfoundmyselfdrawnmoretofindingouthowtoraisecapital
andconnectwithinvestors.Thisledmetoindependentlynegotiateandsign
contractstoraisecapitalforaboutiqueinvestmentbankinNewYorkand
one of the early fund of hedge funds groups based out of South Africa.
I helped them raise capital by identifying potential institutional investors,
completingmarketresearch,andreachingouttoinvestors.
Afterworkingwithinthisareawhilealsoconsultingwithintheareaof
riskmanagementforthreeyears,Itookapositionwithathird-partymarket-
ingfirm.Thisfirmraisedcapitalforthreetofivefundclientsatatime,and
I was in charge of completing the hands-on marketing of three clients: an
$80billionlong-onlyportfoliooptimizationfirm,a$30millionU.S.hedge