The Little Book of Hedge Funds
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The Little Book of Hedge Funds Q&A
with Author Anthony Scaramucci
1. What is a hedge fund?
Hedge funds are investment vehicles that use traditional and non-traditional strategies with a goal of protecting principal, preserving capital and maximizing returns.
2. Are hedge funds good for society?
Hedge funds are good for society when they protect and generate wealth for their clients. A strong return on investment allows for the funneling of more capital into the rest of the economy. Endowments, pension funds and public institutions use hedge funds to meet their obligations to retirees, students and other community members.
3. What’s the biggest hedge fund myth?
People still think that only the wealthy can invest in hedge funds. Once this was true, but now the majority of funds come from institutional investors. This includes pension plans, university endowments, and other investment pools that benefit more than the elite. Even more profound is the increasing ability of retail investors to access hedge funds. Hedge funds are no longer a closed box only available to a select few.
4. What makes hedge funds different than traditional financial products?
Traditional financial products such as mutual funds have a number of restrictions, which are meant for investors. Many investment products are limited in the types of positions they can take, how much borrowing they can do and how they use leverage.
Hedge funds are generally not bound by these restrictions – and this means that traditionally our government has restricted information about them getting out into the larger population. Investors are often intimidated by the mysterious and opaque world of hedge funds. This is what I am trying to change! The biggest misconception about hedge funds is that investing in hedge funds is riskier than putting your money into other asset classes.
5. How can hedge funds outperform the market while taking less risk?
By being smarter. Many hedge funds use Modern Portfolio Theory to pick the right asset allocation and buy the right stocks. This way hedge fund managers can maximize risk-adjusted returns, uncorrelated to the broader market trends. Through diversification, hedge funds put correlated positions in their portfolio so as to yield higher returns while reducing risk.
6. Why should the mass affluent join hedge fund investors?
Hedge fund managers are the best money managers in the world. Why shouldn’t a broader base of investors have access to the best talent?
7. As a member of the mass affluent community, how can we invest in hedge funds?
For those unable to afford the minimum investments, the mass affluent can use hedge funds that allow access to the very best funds at amounts the mass affluent can afford. I am making a push to attract investment from individuals with a net worth of $100,000 to $1 million, not counting their primary residence.
8. What are the principal qualities you look for in a fund manager?
I look for managers who have the right pedigree – that is, have the experience and skill to execute a particular strategy in a particular market – with the right temperament to succeed. I look for thoughtful, deliberative managers and run careful empirical analysis of their portfolios.
9. Is regulation good for the hedge fund industry? Do we have too much regulation or the right amount?
In a capitalist economic system, relying on market controls is the best way to efficiently manage the economy. There is a role for regulation to play in mitigating excess and a certain level of uncertainty, but as a general rule of thumb, the less regulation the better.
10. Where do you see the industry ten years from now?
Even in the wake of the financial crisis, the hedge fund industry remains strong, and competition among funds for investment money will continue to intensify. I see a larger, more robust hedge fund industry, helping even more people than it does now through a wide variety of strategies and investment vehicles.