...for some of the hedge fund guys here

Discussion in 'Professional Trading' started by ktm, Jun 19, 2002.

  1. ktm


    Interesting article from II about obtaining clients and what's important to them. This makes sense since we don't advertise and my experiences are similar.


    Blind Faith: Affluent Hedge Fund Investors Largely Clueless
    Private Asset Management
    Mindy Rosenthal

    High-net-worth investors may be classified as sophisticated, but that's hardly the case when it comes to hedge funds. The majority of these hedge fund investors don't even know the type of hedge funds in which they are invested, according to a study of 384 affluent hedge fund investors conducted by consultancy Prince & Associates.

    Three-quarters of wealthy investors said they didn't know their hedge funds' investment styles, acceptable types of investments, specific holdings, if the funds used a benchmark or what it might be, risk information or use of leverage. Furthermore, these investors didn't care to know, found the study of affluent individuals who had invested in hedge funds for over two years, representing an average of 9.6% of their investable assets. "The three-quarters who don't know do not care," said Russ Prince, founder and president of Prince & Associates. "They made the selection based on trust of the person working with them and are relying on that trust."

    This lack of sophistication was evident with both direct investors and those who used intermediaries--only 30 of the 127 direct investors showed a high level of knowledge about their hedge fund investments. About the same ratio--1:3--held for those who used intermediaries, where 193 had little knowledge while 64 had high knowledge, the study showed.

    Choosing A Manager

    Trust based on some sort of a personal link appears to be the main factor when making a direct investment, regardless of whether the investor understands a lot or a little of the manager's style. Direct investors said they picked their manager because friends and families were investors, based exclusively on personal contact and not searching for other managers, and promise of absolute performance. Those with high sophistication added they liked the lack of regulation, wanted to know the investment philosophy and see a track record. Trust was also a top factor for those who used intermediaries, only this time it was trust in the intermediary. Both sophisticated and not also were attracted by the promise of absolute returns.

    High-net-worth investors represent the largest segment of hedge fund investors, and a large majority of them rely on social networking to pick managers, said Prince. This is not suggesting that performance takes a back seat, but rather when meeting with potential clients, managers should realize talk of such things as investment strategy, transparency and value at risk, is largely irrelevant, he added. It's the relationships that count.

    © Copyright Institutional Investor, Inc. 2002
  2. Aaron


    As long as my investors can tell you how risky my fund is, the other characteristics are secondary.
  3. Aaron


    Oh, and thanks for posting the article, Ktm. Interesting!

  4. This makes total sense in light of human nature.

    Reminds of that study they did on engineering graduates- even in a field as technical as engineering, 93% of success was attributed to social/interactive skills, only 7% to actual quality of knowledge/expertise.

    Got to have charisma (and a sweet rolodex if possible)
  5. Makes sense to me. Makes total sense. I think that about 10 individuals who I am friends with own stock in THV to the tune of about 100k shares total, yet only my father has the slightest idea of what the company does. None of them intend to do any research. They all intend to rely on me, yet they're making investment decisions with a lot of money. It's strange, if they were buying a tv for 300 dollars, they'd spend 2 hours at the store researching which model had the best features, but they can plunk down into 15k shares and not even know the name of the company, just the ticker symbol. None has ever asked me a question about it, and when I tried to tell them things about it, they were generally bored. The sheer fact that I have 100k+ of it was enough for them to go out and buy.
  6. ktm


    I think a lot of that stems from having professionals handle the more important aspects of your life that require expertise, without getting into the minutae.

    I trust my doctor, lawyer, accountant etc...so why not trust my financial advisor? If the doc says I need to eat less of this and more of that and start taking certain meds for a certain reason, I do it. I don't need to know about obscure test results and double blind studies, I trust him to have that knowledge.

    I think the same thing applies to us. Most people just don't give a damn what we invest in provided we make them a decent return.
  7. tntneo

    tntneo Moderator

    Same experience here.
    They only want to know the risk profile, expected return and usually the general strategy (no detail).
    Sophisticated investors are sophisticated in the way they diversify. Not that it requires great skill from them. but it does put them in a very select group.. very few investors diversify properly. So they are way more sophisticated than 90% of young investors (older investors know better imo and diversify more).