The Future of Hedge Fund Investing A Regulatory and Structural Solution for a Fallen Industry

by Agarwal, Monty

• ISBN13: 9780470537442
• ISBN10: 0470537442
• Edition: 1st
• Format: Hardcover
• Copyright: 2009-10-05
• Publisher: Wiley
• More Book Details
• Purchase Benefits

Summary

In the wake of recent ponzi scandals and the loss of billions of dollars, the hedge fund industry has been sent reeling. Factors such as the lack of transparency, little regulation or risk management, and inexperienced hedge fund managers all led to the demise of the hedge fund industry. The fact remains, however, that hedge funds are here to stay, but author Monty Agarwal argues that certain changes must come first. The Future of Hedge Fund Investing takes an in-depth look into what Agarwal declares an "expert failure" and then describes in detail how the industry should go about repairing it to make sure it never happens again. Agarwal has created five "must-haves" for the future infrastructure of hedge funds: 1. An independent industry recognized auditor; 2. An independent industry recognized administrator/custodian; 3. Trade execution via independent entities, like prime brokers; 4. Fund valuations conducted independently by a third party, like an administrator; and 5. Hedge fund manager who is willing to talk at length and in depth about his or her strategy and provide regular risk and return reporting.

Author Biography

Monty Agarwal worked as an interest rate and currency trader on Wall Street between 1995 and 2003. From 2003 to 2008, he was a portfolio manager in the hedge fund industry. Agarwal founded Predator Capital Management, which had $500 million under management, where he was the portfolio manager of an Asia-focused interest rate and currency market strategy. Agarwal also served as a portfolio manager for III Funds. He holds a bachelor's degree in computer science and engineering from the University of Pennsylvania and an MBA, with a concentration in finance and business economics, from the University of Chicago Booth School of Business. Visit www.MACMLLC.com to learn more about the services Agarwal provides to the hedge fund investor community.

Table of Contents

Foreword	p. xiii
Introduction	p. xv
Recent Hedge Fund Scandalsp1
Palm Beach, Florida	p. 1
KL Financial, March 2005	p. 2
Ritzy Palm Beach Offices:Looking the Part	p. 3
Ronald Kochman: The Facilitator	p. 4
The Duping and the Post Mortem	p. 4
Amaranth Advisors, September 2006	p. 6
Outgrowing Its Core Competency	p. 7
Brian Hunter	p. 7
Risk Management Failure	p. 8
Bernie Madoff, December 2008	p. 9
Bernie the Broker Overnight Becomes a Derivatives Trader	p. 10
Palm Beach Connection and Robert Jaffe	p. 12
Conclusion: Failure of the So-Called Experts: The Funs of Funds	p. 13]
Split Strike Convergence	p. 14
The Mystery of the Missing $65 Billion	p. 15
Relationships Do Not Trump Due Diligence	p. 18
When Investing in Hedge Funds, Hire Experts	p. 18
ôWe Did Not Knowledge What We Were Investing Inö Is Not An Excuse	p. 19
Conclusion: So Called Experts, Funds of Funds, Have Failed	p. 19
The Players	p. 21
Flow of Capital in the Hedge Fund Industry	p. 22
Pension Funds	p. 22
High Net Worth Individuals (HNWs)	p. 24
Banks	p. 26
Endowments	p. 28
Conclusion	p. 30
Hedge Funds	p. 31
Incentives and Disincentives of the Hedge Fund Fee Structure	p. 32
Education of the Future Hedge Fund Manager. Jim Simons, Renaissance Technologies (A $34 billion hedge fund)	p. 35
Training Grounds of the Hedge Fund Manager	p. 36
The Chart Readers	p. 37
The Quants	p. 37
The Global Macro Trader	p. 38
From a Caterpillar to a Butterfly	p. 39
Skills of a Trader	p. 40
Personality of a Trader	p. 42
Andrew Lahde's Goodbye Letter	p. 42
Hedge Fund Strategies	p. 45
Long-Short Equity	p. 46
Event Driven	p. 47
Global Macro	p. 49
Fixed-Income Arbitrage	p. 50
Relative Value Arbitrage	p. 51
Effect of 2008 on these Strategies and Looking Forward	p. 53
Hedge Fund Service Providers and Regulators	p. 57
Building a Business	p. 57
Lawyers	p. 58
The Offering Memorandum: Caveat Emptor	p. 59
Administrators and Custodians	p. 61
Auditors/Accountants	p. 65
Prime Brokers	p. 67
Third Party Marketers	p. 68
Regulators	p. 70
The Toothless SEC	p. 71
Conclusion	p. 73
Funds of Hedge Funds	p. 75
Philosophy and Services	p. 75
Failure of Fiduciary Duties	p. 77
Statistical Bucketing by Strategy	p. 78
Due Diligence and the Analyst	p. 79
What's in a Name	p. 81
The AIMA Due Diligence Questionnaire	p. 82
Where Are the Experienced Professionals?	p. 84
The (Lack of) Ongoing Due Diligence	p. 85
Multi-Strategy Hedge Funds	p. 86
An Expert Failure	p. 89
Uselessness of Historical Data Crunching
Quest for Steady Returns: Systematic Destruction of Alpha
Bucketing by Asset Class and Geography; A Flawed Concept Alpha Versus Beta: The Trader Generates Alpha not the Strategy	p. 97
Prolonged Bull or Bear Market	p. 99
Markets with Short Cycles	p. 99
Relative Value Markets	p. 100
Specialized Strategies	p. 100
10 Percent to 20 Percent Allocation Rule	p. 101
Managing a Hedge Fund Manager	p. 103
Book-Runner Versus a Proprietary Trader	p. 104
So-Called Hedge Fund Experts	p. 105
Hedge Funds: House of Second or Third Chances?	p. 107
John Meriwether	p. 107
Brian Hunter	p. 107
December 2008: Deutsche Bank Credit Desk	p. 107
January 2009	p. 108
Why Does a Losing Hedge Fund Manager Shut Down His Fund?	p. 108
Why Does the Industry Keep Funding a Failed Trader?	p. 108
Conclusion	p. 110
Remodeling the Funds of Hedge Funds	p. 113
Five Inviolable Commandments	p. 113
Traders Managing Trde Investments	p. 114
Differentiate Between Alpha and Beta Strategies	p. 115
Bucketing Based on Trader Methodology	p. 116
Mean Reversion	p. 117
Positive Carry	p. 118
Systematic or High Frequence	p. 118
Momentum	p. 119
Appropriate Risk Template by Strategy	p. 120
Hypothetical Interest Rate Risk Report	p. 121
Hypothetical FX (Foreign Exchange) Risk Report	p. 124
Manager Stop Loss and Linked Redemptions	p. 126
Hypothetical Returns of a Proprietary Trader	p. 128
Not 10 Percent, Majority Every Time	p. 130
Ongoing Due Diligence: It Is Not Just About Returns	p. 132
Correct Risk Due Diligence	p. 113
Position Concentration, So What	p. 136
Management of Stop Loss Limits: The Be-All and End-All	p. 137
Over-Leverage and Illiquidity	p. 139
Market Liquidity	p. 140
Borrowed Cash	p. 140
Long Gamma Leverage	p. 141
Hedging; Will the Market Let You Short?	p. 142
Interviewing a Hedge Fund Manager	p. 145
Relationship	p. 145
Strategy-Related Questions	p. 146
What Qualifies You to Execute This Strategy?149
Work Experience	p. 151
Risk Appetite	p. 152
Thinker, Adapter, Entrepreneur?	p. 154
Regulating Hedge Funds	p. 169
Borrowers, Bankers, and Investors	p. 161
Don't Blame the Products, Blame the Users	p. 162
Failed Due Diligence on Part of Investors	p. 163
Failure of Fiduciary Responsibilities by Brokers and Lies by Borrowers	p. 164
No Hedge Fund Has Been Bailed Out	p. 165
Systemic Risks and Derivative Transactions	p. 167
Regulating Hedge Funds	p. 169
The End	p. 171
Robert Allen Stanford's Ponzi Scheme	p. 171
Hedge Fund Industry Offers More Disclosure	p. 172
Similar Problems with the Pension Funds, Endowments, SWFs	p. 173
Bibliography	p. 175
Index	p. 17
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