With so many hedge funds in the investment universe, it is significant that investors know what they are looking for in order to make more efficient the due diligence process and make timely and appropriate decisions. Search strategy can be used as performance metrics to determine hedge fund regularity over time and to appraise the guidelines themselves to determine whether the guidelines remain convincing across different economic environments. Lastly, guidelines can help third parties to better support an investor in his or her search process.
When looking for a high-quality hedge fund, it is significant for an investor to define the metrics that are significant to he or she and the outcome required for each. These strategies can be based on absolute values, such as returns that exceed 20% per year over the preceding five years, or they can be comparative, such as the top five highest-performing funds in a particular category.
The first rule an investor should set when selecting a fund is annualized rate of return. Let's say that we want to find funds with a five-year annualized return that go beyond the return on the Lehman Brothers World Government Bond Index (LBWGBI) by 1%. This filter would get rid of all funds that underperform the index over long time periods, and it could be attuned based on the performance of the index over time.
Here is a list of primary metrics to use for setting strategy :
Setting up guiding principle helps streamline the hedge fund search method by eliminating funds that should not be considered and allowing an investor to focus his or her time performing due attentiveness only on funds that are worth evaluating. These strategies can also assist third-party marketers and/or institutional platforms in targeting prospective investors for particular funds.
These strategies will help get rid of many of the funds in the universe and identify a workable number of funds for further analysis. An investor may also want to think about other guidelines that can either further decrease the number of funds to analyze or to recognize funds that meet additional criteria that may be important to the investor. Some of the examples of additional strategy include :
Fund size/firm size - The instruction for size may be a minimum or maximum depending on the investor's inclination. For instance, institutional investors often invest such large amounts that a fund/firm must have a minimum size to provide accommodation for a large investment. For other investors, a fund that is too big may face future challenges using the same tactic to match precedent success. Such may be the instance for hedge funds that invest in the small-cap equity space
Track record - If an investor wants a fund to have a minimum track record of 24 months or 36 months this principle will get rid of any new funds. Nevertheless, sometimes a fund manager will leave to start his or her own fund and even though the fund is new, the manager's performance can be tracked for a much longer time period.
Minimum investment - This criterion is very significant for smaller investors as many funds have minimums that can make it complex to diversify properly. The fund's minimum investment can also give a suggestion of the kinds of investors in the fund. Larger minimums may specify a higher proportion of institutional investors, while low minimums may specify of a larger number of individual investors.
Redemption terms - These terms have implications for liquidity and become very significant when an overall portfolio is extremely illiquid. Longer lock-up periods are harder to incorporate into a portfolio and redemption periods longer than a month can present various challenges during the portfolio-management method. A principle may be implemented to get rid of funds that have lockups when a portfolio is already illiquid, while this principle may be relaxed when a portfolio has sufficient liquidity.
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