Managing Hedge Fund Managers: Quantitative and Qualitative Performance Measures

CHAPTER 3

The Search for an Honest Man Finding Your Manager

 

 

During the times of ancient Greece, there was a beggar who made his home in a large tub on the streets of Athens. His name was Diogenes. Diogenes spent his days walking the streets, holding a lighted lantern and looking for an honest man. He never found one. In the process he did, however, expose many lawyers, and he became known as a member of the philosophical School of Cynics.

The search to find a good hedge fund manager may seem remarkably similar to the quest of Diogenes. I do believe there are many honest folks in the hedge fund business. Finding one will, however, require a set of tools similar to those involved in Diogenes’s search: a lighted lantern (deep insights) and a healthy amount of cynicism. A prospective investor has already undergone a lengthy process of defining his investment guidelines and parameters now he must make a definitive decision to allocate a target level of capital to hedge funds. This involves the arduous task of sourcing the managers, which is more complex than a search to locate and analyze traditional long-only managers.

Hedge funds, unlike mutual funds and traditional investment advisers, are not required to be registered with the Securities and Exchange Commission (SEC) or to report performance to a central source. SEC rules governing “accredited investors” and advertising keep information flow to a minimum. Accredited investors are those with an excess of $200,000 of gross annual ...