New York (HedgeCo.net) In the new book, ‘Fund of Funds Investing – A Roadmap to Portfolio Diversification,’ Richard Bookbinder and Daniel Strachman write about the evolution of capital markets and the changes that have taken place in the arena of alternative investing.
I asked Richard Bookbinder, founder of Bookbinder Capital Management LLC and co-author of the book about his thoughts on what investors should look for in choosing a hedge fund manager.
Some pointers include:- Ensure that the manager has a verifiable track record, it is important to review performance results and source of returns not only in 2009, but also to review prior and current periods.
- Take time for due diligence and review: 3 to 6 months minimum, even as long as 12 to 24 months.
- Look at the quantitative as well as qualitative results:
“While a quantitative review of performance and correlation results is critical,” Bookbinder said, “the qualitative on site due diligence includes review of systems, procedures, processes, and risk management systems along with extensive meetings of managers and key personnel.”
- Size is important, but bigger is not always better:
“While much of the new flow of capital into the hedge fund industry has been directed to large, visible hedge fund complexes, size should not be the key factor, “ The author explained, “There are many smaller funds with long, consistent track records that have outperformed the large funds.”
- Learning from history:
“It is important to understand what the source of alpha was in driving past performance returns.” Bookbinder said regarding the history of market performance and its relevance on future performance. “Investors had the wind to their backs in 2009 with the equity and credit market rally. In 2010, the story has changed. Performance returns are dependent upon manager skill sets and depth of the organization team.”
In conclusion, I asked what the crisis had to teach us. Bookbinder said, “Due diligence is not a check the box business. It must be performed by seasoned analysts who have a specialized understanding of the strategies.”
Bookbinder is a frequent speaker at hedge fund industry academic forums including the New York Society of Security Analysts and various hedge fund industry programs. He is also active in charitable activities including as a member of the Board of Trustees of the Darrow School, New Lebanon, NY. He is the External Advisor to the Wharton Hedge Fund Club, and participates in the Executive Student Partnership Mentoring program at Baruch College, New York, NY.