Dr. Chris Hsu Explains Hedge Funds
When most people hear politicians talking about hedge funds or read about them in the press, more often than not it is a scathing attack of some sort on the greedy rich who run them or a grievance about the unfair advantage they have over the average retail investor. Newspapers and op-eds begrudgingly report the success of the best funds and relish in the failures of others. The truth is that the vast majority of people are misguided or uninformed as to what a hedge fund is or how it operates. Christopher Hsu thinks that the greatest misconception out there is that a hedge fund is always hedged or protected against losses, while the average hedge fund investor is a helpless victim of violent market fluctuations. As such, the general public is led to believe that a wealthy individual who can gain access to a hedge fund is protected while the average individual is left to fend for him or herself amongst the wolves. This belief could not be further from the truth.
Chris Hsu thinks the true definition of a hedge fund is that it is a private investment that is limited in scope as to who can participate in that investment. The only factors that differentiate it from other investments are the fact that it is private, and that only certain qualified individuals are permitted, under current law, to invest in the fund. What many are unaware of is that the risk of loss is the same, if not greater, in a hedge fund than it is in any other investment. The reason a hedge fund is private is that regulators feel that the complex nature of the different strategies is not understood by the general public.
Private or Public?
A typical Christopher Hsu can invest in any hedge fund product. It could be a fund focused on stocks, bonds, derivatives, real estate, art, guitars, widgets, or anything. The type of hedge fund is inconsequential; all that matters is that it is defined as a hedge fund because it is private and that only qualified individuals can invest in the fund.
The idea that hedge funds are all safely hedging (as the name would imply) against losses is a complete fallacy. If anything, one is more likely to lose their entire life’s savings investing in a speculative hedge fund than they are investing in a common stock, mutual fund or an ETF. The media and the government may like to paint hedge fund managers as enemies of society who profit from the financial losses of the middle class, but this image is completely misguided. In reality, a hedge fund is like any other business except that the competition is even more cutthroat and the chances of failure are even greater. Not only do you have the big established players, but you also have a constant stream of young and eager investment professionals all claiming to have some kind of edge on other investors, trying to achieve outsized returns and justify the generous fees hedge funds demand. It is no wonder that the average hedge fund has underperformed market indexes in recent years given the incentive to take a risk and “shoot for the moon” to amass early returns. The incentive to try and hit a home run early on to attract assets without a proper risk infrastructure is so great that in actuality the hedge fund industry is much more likely to produce significant losses to capital than other asset classes.
That being said, funds that can produce the consistent and above-average returns that encourage investors around the globe to continue the chase for outperformance do exist. These are the funds that all aspiring managers seek to emulate. What most of these managers do not realize though, is that it is not just a good strategy and consistent returns that allow these funds to be so successful, but a strict and exacting operational infrastructure that is found in any successful business. Without the complete package of a tested strategy and a sound business, there is no chance for success.
The Chris Hsu Guide
Christopher Hsu’s book will provide a simple outline of how hedge funds are structured, highlight the fundamental issues one must consider when launching a new hedge fund, and give an overview of the operational infrastructure required for a successful launch. It is intended for all types of people: The sophisticated investor considering investing in a fund, the financial professional looking to launch their own fund, or even the average individual being generally curious about hedge funds.
There are very limited resources out there for a start-up fund. Expensive manuals and overpriced consultants are available, but very little is written by someone with real experience launching a fund and running its day-to-day operations. There are huge misconceptions as to what hedge funds are, and with the limited information available, there needs to be a first-hand account from someone who has been through the entire process, from conceptualization to the successful launching and raising of assets in a hedge fund. The hope is that this guide will inform the reader of the basics required to launch a successful fund and highlight some of the major issues investors will consider when deciding whether or not to invest in a start-up fund.
Moreover, Chris Hsu thinks the most important aspect of a hedge fund that an individual reader can learn from this book is that every single hedge fund is different, but the importance of an institutional-grade operational infrastructure is the same for all.
Develop Your Own Strategy
Each person has their own strategy and a particular way of running a business, but to be successful and to attract investors, certain criteria must be met. The reason hedge funds are limited as to who can participate in them is that regulators around the globe want to protect individuals who are not familiar with the financial markets from being drawn into risking too much of their wealth on an unproven investment strategy. The regulatory environment for hedge funds is constantly changing, and hopefully, Christopher Hsu’s book provides potential investors with a basic concept of how a fund is structured and what institutional due diligence checks they should be aware of before choosing to invest in a hedge fund.