Starting a Hedge Fund

15 Common Hedge Fund Mistakes (Part 3)

Written by Bobby Jan for Gaebler Ventures

Nobody is perfect, and hedge fund managers are no exception. This article, the third in a series of six articles, examines some common mistakes hedge fund entrepreneurs make.

In the first article in this series, we listed 15 common mistakes made by hedge fund entrepreneurs and discussed the first mistake. Our second article discussed more mistakes made by hedge fund managers, including mistakes 2, 3 and 4.

Now, let us turn our attention to mistakes 5, 6, and 7:

• Mistake 5. Fund tries to appeal too many types of investors.
• Mistake 6. Manager is short-sighted.
• Mistake 7. Manager fails to manage client expectations.

Hedge Fund Mistake #5: Fund Tries To Appeal Too Many Types Of Investors.

Generally speaking, hedge fund managers are trained in a particular type of trading and offer very specialized products. Specialization leads to differentiation and hedge fund managers often choose to specialize in order to deliver the highest return. As a result, hedge funds are often commingled into an investment fund.

Some hedge funds customize their product offerings to different investors by running segregated accounts. Such customization takes into account the client's risk tolerance, tax considerations, leverage, strategy, etc. Offering customized products can help attract investors for hedge fund entrepreneurs. However, when carried to excess, hedge fund entrepreneurs divert too much energy and focus to product customization rather than focusing on creating attractive returns.

Hedge Fund Mistake #6: Manager Is Short-Sighted.

All too often, hedge fund managers focus too much on short-term issues and performance. As a result, long-term plans are marginalized, priorities are distorted, and long-term performance is compromised.

Hedge fund clients are very sensitive to performance and different clients have different holding periods. Hedge funds with many clients will always face some sort of client pressure on short-term performance. (For example, a client might be particularly interested in recent performance if the client plans to liquidate a portion or all of his investment.)

Hedge fund managers are advised to carefully balance short-term demands with long-term goals. Managers must determine how often performance reports are distributed to clients, redemption dates and frequency, etc.

Hedge Fund Mistake #7: Manager Fails To Manage Client Expectations.

Delivering high returns is always desirable. However, hedge fund managers must carefully manage client expectations. Unexpected returns or losses may result in losing clients.

Hedge Fund Errors Continued

In the next article in this series, we will discuss mistakes 8, 9 and 10. If you're ready to continue reading our articles about hedge fund entrepreneur mistakes, read the next article.

Cheng Ming (Bobby) Jan is an Economics major at the University of Chicago who has a strong interest in entrepreneurship and investing.

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