Why a Hedge Fund Manager May Not Be Good at All

Not every hedge fund manager is a highly qualified professional. In fact, it's not that hard to start a fund. So, do your due diligence on hedge funds or be sorry later.

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Many investors think that hedge fund managers are super smart folks who, after successful career on Wall Street, decided to go on their own. There are superstar traders, analysts, and money managers forming their own funds.

Many don’t know, however, that starting a hedge fund is relatively easy. Some funds in the incubator/start-up period, with little capital, and few investors don’t need to go through lots of paperwork. Moreover, modern technology makes it inexpensive to trade and get research, while operations can be outsourced. Pretty much anyone can start a hedge fund.

Now, if anyone can start a hedge fund, surely it is worth investigating the management. But then, will an experienced manager, or a Nobel Prize winner in Economics, guarantee success? Not necessarily. In fact, Nobel Prize winners had started hedge funds and…lost money.

What to do then? There is a potentially safer alternative. The Funds of Funds invest in other hedge funds. This provides diversification, given the funds in the portfolio are not too positively correlated (don’t move up and down in the same direction). The Funds of Funds charge a management fee in addition to paying fees to the funds in which they invested. The good thing is that the Funds of Funds managers negotiate the fees down with individual funds once larger investment is made.

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Check on a manager to whom you want to send your money to avoid sorrow later