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  • Matthew Levy and Ariel Shlien

The Most Important Things to Look for in a Hedge Fund

Updated: Dec 12, 2020

The flip side of this year’s financial volatility is a once-in-a-lifetime investment opportunity. One way to exploit that is to invest directly into self-chosen equities and assets. But many others are turning to top hedge fund companies, online investment clubs, and alternative investment platforms. These hedge fund clubs usually offer an edge, such as professional management or superior technology, that beats amateur trading.

Things to look out in Hedge Fund, Hedge Fund Manager, Hedge Fund

In this article, we’ll go over and explain the top factors to select for when choosing your hedge fund company.

Great Return

This one almost goes without saying. Hedge funds, like any other item on a list of alternative investments, exist to give investors a return.

At this point, less savvy investors might scratch their heads. There’s been some sensational press about how top hedge funds and global family offices have recently lagged market aggregates, like the S&P 500. If that’s true, then why would anyone pick a hedge fund over a no-fee ETF?

The answer is in the next category; in a nutshell, hedge fund managers are trained to mitigate downside (i.e., hedge against risks) far more than a long-only portfolio.

Mitigating Downside

When selecting an investment vehicle like a hedge fund or fund of funds, it’s critical to assess how it performs in bad economic times. Many exceptional funds are market-neutral, which means they make money regardless of how the overall market is doing. Companies like top family offices achieve this using uncorrelated alternative investment strategies and sophisticated financial options.

The other aspect to downside mitigation is to examine the historical worst losses of the investment vehicle. A fund should not only retain value in bad economic times, it should also manage to avoid losing capital in any market circumstances. Danger signs on this count include excessive leverage and risky contrarian strategies.

Third Party Oversight

Jaime Dimon, CEO of JP Morgan Chase, once remarked that his firm employees the entire population of some small American cities – and those cities usually have many prisons. What he meant is that in an industry as large and lucrative as financial services, there will always be unscrupulous actors trying to commit fraud.

One way to avoid being a victim is to ensure that your hedge fund has meaningful third-party oversight. This could take the form of outside independent directors, who are watchdogs for the fund’s fiduciary duty. Or it could be employing separately managed accounts (SMA’s) or a third-party Fund Administrator to value assets and independently issue the Net Asset Value (NAV) and monthly statements. Whatever form it takes, some independent supervision is critical to safeguarding your assets.


When selecting an alternative investment platform, it’s important that it not be overly enthusiastic about one asset class or strategy. A long-only fund, for example, probably would not be the hedge fund manager of choice for the markets of 2020. Similarly, funds that are committed to only one sector (such as biotech or energy), or even those which neglect global equities or bonds, are vulnerable to risks that diversified funds don’t see.

One way to achieve diversification is to invest in a multi-manager fund, which chooses individual hedge fund managers the way that a hedge fund selects equities. That additional layer of abstraction means that you are allocating your money towards many more assets than an individual hedge fund company.

For more information, please contact Ariel Shlien at

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