Family offices used to go for safe options in investing, but after the 2008-09 crisis, when hedge funds became much more regulated, this changed dramatically—family offices became the comparatively less regulated option. Since then, many risk-keen investors, including billionaire traders like George Soros, John Paulson, John Arnold have moved to open family offices.
One of them was Bill Hwang, owner of Archegos Capital Management. His family office made headlines back in March after a forced liquidation of $30bn of its assets due to unfunded margin calls, costing banks billions of dollars in losses.
The collapse caused concern among both regulators and investors, particularly in the present easy money environment. And with 38% of family offices planning to increase their exposure to hedge funds, it is more important than ever to know how to properly vet hedge funds to invest in.
Here are some of the most important factors to consider:
Age of the fund
Some hedge funds invest in a small number of stocks, which is why a few successful picks can have a significant impact on its performance. As the hedge fund grows, they have to increase their stock portfolio, which means that each stock has less impact on performance. This makes it increasingly difficult to deliver substantial returns.
Smaller funds with managers with a proven track record can thus potentially give much higher returns to investors. Risk is always involved, as it is more difficult to assess the performance of a relatively new hedge fund.
Skin in the game
Managers of all good hedge funds will have a significant investment in their own fund. This shows that the managers have skin in the game and an incentive to perform.
This also means that the interests of investors and investment managers are in alignment, and that both stand to lose if the fund turns south.
Use of AI-facilitated trading
Good traders don’t trade on intuition. They formulate a strategy, test it, and apply it to the letter, no matter the circumstances. In the long run, the systematic approach wins.
Artificial intelligence can improve this process by making split-second decisions without hesitation, exactly as it was instructed.
A successful hedge fund will also have to know how to constantly discover new trading opportunities. This is where the AI excels as well, utilizing machine learning to discover complex patterns in the data to predict market moves.
Applying AI to trading decisions is not easy, and it requires deep investing expertise. For a competent hedge fund manager however, the technology might just make the difference. This is why the top three hedge fund managers in the world all use computer-assisted trading.
Passionate and qualified investors
However, AI cannot make investment decisions alone. That is why it’s critical that a hedge fund is run by experienced managers who have a proven track record in delivering consistent returns.
There aren’t many talented investors in the world, and many of them are managing hedge funds. That is why directing a part of the investment to the hedge fund space is a good strategy to maximize returns.
But they also have to love what they do. Good hedge fund managers will eventually earn more money than they’ll ever spend. Why would they continue to work if they don’t enjoy it?
One should therefore look for signs of passion in a hedge fund manager, as he might provide investors with great returns for a very long time.
Wrap Up
Properly assessing hedge funds to invest in is key for any family office looking to maximise their returns while keeping the risk on the low side. A reliable hedge fund should practice putting a slice of their own money into investments portfolio, apply computer-assisted strategies, and have a passionate and professional team of investors. It’s important to remember that size might not always be a key criterion and such attributes could be found in smaller-scale hedge funds as well.
