I have invested in a Hedge Fund which is in a 70% Drawdown currently. This is the largest drawdown this fund has experienced since inception. The fund has recovered from a 50% Drawdown previously. Would you sell the investment and put the money elsewhere? Or keep the investment in the Hedge Fund?
How can you expect anyone to offer a suggestion without more information on the fund's strategy and market? One fund that is off 70% may be a serious problem. Another may be a great opportunity. When considering whether or not to sell any instrument, it always helps to ask "Would I be interested in buying at this level if I didn't own it?" If the answer is "Yes", then stay with the trade.
Where's the third option: Get in a time machine, go back in time to when the fund was down 20%, ask the management serious questions about the strategy, and get out!
Would you sell the investment and put the money elsewhere? Or keep the investment in the Hedge Fund? ----------------------------- Choice number 3 The hedge fund might close.
Down 70%?? How much more screwed up could they be? I would say hold and maybe a miracle will happen any you will get back to like -40% or something like that.
Another way to look at it is that they will have to make 233% on current equity to get back to high water mark. Take the whole monthly history of the fund and compute their "average monthly return". Is that at least > 0%? Then divide that into 233 and determine the average number of months it will take you to get ahead again. If you can do better somewhere else, that is your answer. On the plus side, you won't be paying an incentive fee for awhile. And I would hope the manager would at the very least waive their management fees at this point as a good faith gesture. Ask the fund if they have de-levered or if they are still trading the money as if it were beginning-of-year-equity. If they haven't de-levered, the chance of that -70% turning into -100% is a lot higher. Right now the fund might be in "lottery ticket" mode, meaning that they have no income coming in unless they swing for the fences and make it all back fast. Or do they shutter the fund and simply open a new one so they can reset the high water mark to zero? Make sure they are not gambling with your money and/or don't care anymore, and instead intend to stick around for awhile and fight back. Is this the manager's only fund, or do they have other products that are doing ok? Your other option outside of redeeming or standing pat is asking if you can be moved to another fund. Going to a "fund of hedge funds" can be a possible solution to this single-manager, single-style risk too. Gets you exposure to the hedge fund sector, far lower minimum investment than doing it yourself, but higher fees since the FoF manager charges bps on top of the underlying managers. But if one manager blows up, that is only a few percent of your portfolio.
I might be wrong, but I believe That's depending on the goal of the fund. Some funds adopted aggressive approach, such as the one managed by several members of former Turtle. And this kind of drawdown is expected. Another will play semi aggressive, and conservative. So, that's truly depend on your financial goal.
Thanks everyone for your thoughts. Thanks Vorpal for your well thought out answer. The fund was averaging about 2% a month until this last drawdown. The monthly avg now stands at .62%. So it would take 375 months for the fund to recover if it keeps gaining at the current monthly avg. I will not be paying any incentive fee for a very long time if I choose to hold. I believe the fund is trading based on the equity at the start of each month. The manager has started a new fund and closed this previous fund to new investors.