How to Choose a Hedge Fund

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Sept. 26 (Bloomberg) -- Agecroft Partners Founder and Managing Partner Don Steinbrugge discusses choosing hedge funds with Deirdre Bolton on Bloomberg Television's "Money Moves." (Source: Bloomberg)

Always glad to see you.

This jobs act a sickly blows the doors off of the hedge fund industry and other private funds as well -- this jobs act basically close the door off the hedge fund industry.

For an investor, what are the big pitfalls to watch out for?

I think the big pitfalls to watch out for is people focusing only on the historical performance of the fund.

That is the easiest metric to look at, right?

It is.

Typically what did the best of the the past 12 months or two years might be the worst performing fund going forward.

In addition to that, what should investors take into consideration?

You need to do multiple evaluation factors.

Look at the organization, make sure there is no fraud there.

Look at what the assets under management are.

If it is under 100 million dollars, not sophisticated, stay away.

Make sure you have a chief operating officer that handles all the noninvestment activities of the fund.

You do not know -- you do not want the portfolio manager distracted.

And go to the office and kick the tires.

You're saying any office that does not welcome you are open its store, even if they say they are kind of on the smaller side and do not have time for this, you say, take your business elsewhere?

I can tell you that 95% of institutional investors that allocate to a hedge fund go to the office before the make and allocation.

Which is a fair part of the process, i would assume.

What about when you talk about aum, it is also how it is calculated.

It can sound kind of stupid, but it is from the inception.

How are they doing that aum and calculating performance?

Does it matter if you start at the beginning or where you are putting the metric questionnaire as far as assets under management, you want to know what is in the fund.

You want to know about separate accounts.

$100 million is important because you want to make sure they have enough revenue to support your organization.

What else should people on -- should people be on the lookout for?

Look at the investment team.

Look at the quality of the team, where they went to school, what their pedigree is, where they work.

If they worked for an organization you do not recognize and they are not an experienced hedge fund manager, i would stay away from them.

You have been in the business for a long time and there have been some cautionary voices as far as the jobs act.

Saying that the average investor is not prepared.

Do you think that is true?

What's my take on the jobs act is i think it is a big and if it to individual investors.

They are getting a lot better information from hedge fund managers and talking about the various strategies.

More selection.

They just have to be careful.

You only want to invest in a strategy you truly understand.

If you do not understand it, do not invest in it.

When i look at risk, i look at a 30-year u.s. treasury or i look at a small cap u.s. equity.

Buying those on their own are very risky.

If you have a diversified hedge fund portfolio, you should not have a lot of volatility in that.

In the area, at least in the past, you are really paying for preservation of capital, paying a certain amount of assurance to make sure that portfolio basically performed well.

But then there are some that are much more aggressive than others, so at least you have to know what you're dealing with.

Yeah, you have to understand what the risks are.

The historical record is only important if you compare it to other hedge funds of the same strategy.

What is most important is some of what are you going to get in the future?

You cannot spend historical returns.

You can only spend money you invest on the fun and good returns.

Is it a market environment going forward that is the same as it was historically?

That will tell you a lot.

Some good advice stays the same no matter what.

Great to see you.

He is founder and managing

This text has been automatically generated. It may not be 100% accurate.


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