Running a successful hedge fund requires a laser focus with a comprehensive set of skills not only to prosper but to outperform the competition. These skills include maintaining regulatory compliance, raising capital, communicating with investors, building out the technology, managing large teams – and all this while navigating the markets and striving to outperform for your investors. There are a multitude of risks that hedge funds face each day and this post touches more on that.
Many hedge funds claim to have a “secret sauce” or a proprietary trading/investment system that allows them to gain an edge in the investment arena. But are the investment decisions made based on arbitrary metrics – what your competitors are doing – or are they based on a well-specified investment criteria? We recommend a rule-based system set with guardrails to remove human emotion from the investment process, which is what we specialize in.
Risk management and portfolio management are also ongoing issues for hedge funds navigating the financial landscape, and an area we’ve been both researching and implementing solutions in recently. From customizing investment solutions for asset allocation, position sizing, hedging, portfolio rebalancing, risk management, identifying opportune entry and exit points in securities of various asset classes and more, we see what’s around the next turn.
Furthermore, another common issue we often see with hedge funds is related to the execution of trades. Is your execution based on some proprietary method or is it in flux with each trade based on arbitrary discretion? At The Practical Contrarian we recommend an operationalized approach to the execution of trades that is enduring, time tested and ultimately the proof is in the pudding.
Many of the companies we guide fall into our phased process for investing capital by following their rules first along with managing risk as well as executing on particular goals/objectives that inherently change over time.
The moral of the story: Whether you’re a hedge fund billionaire or genius living in your parents’ basement, having the vision to not only understand the future but also capitalize on it is valuable in many ways.