Hedge Fund Investing - Page 3
Selecting the right hedge funds for your portfolio
In picking hedge funds to go into our Eagle Rock Diversified Fund I stick to ones that:
· have been around for at least three years. Hedge funds (like most businesses) that fail often do so in the first three years.
· have an audited track record. Never invest in a non-audited fund of any type. Make certain the audit firm is a well recognized one in the industry.
· have a track record that meets your investing objectives. In our portfolio I stick with hedge funds that exceed the S&P 500 returns by an average of 500 basis points/year
· have a "lock up" period of one year or less. There are plenty to choose from.
· are headed by a general partner with whom I can meet. I only want to invest with people heading the investment process I have met and have confidence in. Hedge fund investing is very much like picking the right ship captain.
· have an investment strategy and a risk management process that I understand. Never invest in any thing that you don't understand!
· have a reasonable fee structure which to me generally means the hedge fund earns 1% per year of the assets we invest and another 20% of any net gain they achieve for us in a year.
The role of funds of hedge funds
Fund of Funds offer the following advantages, particularly to individual and smaller institutional investors. They provide their investors:
· efficient access to a group of hedge fund managers, i.e. a single investment is diversified across all the underlying hedge funds in the fund of funds' portfolio.
· access to a group of hedge funds for a "moderate" investment. For example, you may be able to get into a fund of funds for say a $250,000 investment which could provide you with access to a pool of underlying hedge funds that might each require an investment of $1 million or more.
· with the expertise and industry access of the General Partner who selects and then monitors the hedge funds in the fund of funds.
The perceived disadvantage of fund of funds is that the investors are paying two sets of management and performance fees, one to the fund of funds and one to the hedge funds making up the portfolio.
Visit www.eaglerockfund.com to learn more. I have been investing in hedge funds since 1998 and have learned a lot along the way. It is the only way I am currently investing in the stock market. I expect that will continue for many years ahead. I would welcome any experiences you have had and am open to any questions. It is a subject I really enjoy talking about.
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