Table of Contents
| Acknowledgments | |
| Preface | |
| Pt. I | Why Conservative Investors Should Know about Hedge Funds | 1 |
| Ch. 1 | What's Wrong with Traditional Money Management? | 3 |
| Ch. 2 | How Did Investment Management Go Astray? | 13 |
| Ch. 3 | The Growing Appeal of Alternative Investments | 33 |
| Pt. II | What Hedge Funds Have to Offer | 47 |
| Ch. 4 | What Exactly Is a Hedge Fund, Anyway? | 49 |
| Ch. 5 | A Look at Hedge Fund Performance | 73 |
| Ch. 6 | Narrowing the Field: "The Big Four" Strategies | 91 |
| Ch. 7 | Is There a Hedge Fund Strategy for All Seasons? | 109 |
| Pt. III | Making Hedge Fund Investments | 129 |
| Ch. 8 | Investing in Hedge Funds - How Much? | 131 |
| Ch. 9 | Tapping into the Wealth of Resources | 145 |
| Ch. 10 | Selecting a Hedge Fund That's Right for You | 165 |
| Ch. 11 | Getting Comfortable with the Terms of the Deal | 187 |
| Ch. 12 | Staying on Top of Your Investment | 205 |
| Closing Thoughts | 221 |
| Index | 231 |
Read an Excerpt
This book isn't for Bill Gates, Warren Buffett, or anyone named DuPont,Rockefeller, or Getty. If you're on the Forbes list of the 400 richest Americans, you certainly don't need my advice. Nor is it for the middle-income family saving to buy a house or pay college tuition; the investment philosophy espoused in this book simply doesn't apply.
You will benefit from this book if you are:
- A physician, attorney, or other professional with your own retirement plan.
- A corporate executive who has built up substantial personal assets.
- An entrepreneur who has recently sold a business.
- An individual who has come into a sizable inheritance.
- Anyone nearing retirement who plans to live off the income from an investment portfolio.
In short, I wrote this book for the serious individual investor who wants not only to protect and preserve capital, but to earn consistent, competitive portfolio returns year after year, through good times and bad. That is, for people like me.
When I began my career on Wall Street some 30 years ago, it wasn't with the idea of becoming a captain of industry or the richest guy in town. I had one goal: to accumulate enough assets so that by the age of 60, I would be able to turn my portfolio over to capable investment managers and concentrate on lowering my golf handicap. As it turned out, I met my goal three years early, and in 1997, I retired from my partnership in a very successful traditional money management firm. I had enough of a nest egg to be able to live comfortably off the return generated by my portfolio--or so I thought.
My only remaining task was to find the right investment talent to help me meet my specific investment objectives. I thought that wouldn't be too difficult. After all, if anyone knew the money management community, I surely did. In the course of my career, I had created and run the very first investment management consulting department formed by a major Wall Street brokerage house; I had served as vice president of one of the leading investment management firms in the country; and ultimately, I became a partner in a traditional money management firm that grew from $100 million to over $8 billion in assets under management during my 15- year tenure there. Along the way, I cofounded the Investment Management Consultants Association (IMCA); I wrote a financial best-seller, The Prudent Investor: The Definitive Guide to Professional Investment Management; and I even served as associate producer of the PBS TV series, Beyond Wall Street: The Art of Investing. I knew the investment management industry backward and forward.
Yet three years after I "retired," I am back working full time at a hedge fund, overseeing the management of assets for my family and a group of private investors. Why? It's not that I needed to work in order to put bread on the table. Rather, after considerable research and soul-searching, I reluctantly came to the conclusion that no traditional money manager could give me the kind of performance I was seeking--15 percent annual returns, with no down calendar years.
Given the financial markets' uncertainty and volatility, it was difficult to find any traditional managers who gave me the confidence that they could meet my 15 percent hurdle over each of the next three to five years. And it was virtually impossible to find any who convinced me that they could also deliver on the second objective--no down years. With all the personal contacts and information sources I'd built up over 30 years in traditional money management, I couldn't find any investment manager who I believed could achieve both of my objectives. If I had, I wouldn't be writing this book about alternative investment strategies.
But the fact is, no traditional money manager using conventional tools and strategies would ever hold out the prospect of substantial annual returns with no down calendar years. Not one mutual fund would ever dare put both those goals in its prospectus. And no traditional separate account manager would suggest that was what he or she was offering. For reasons I'll explain, traditional money management simply isn't capable of achieving the kind of consistently positive returns that I and, I suspect, a lot of other affluent investors are seeking.
Luckily, I found another way. And that's what this book is about. I'm going to explain why traditional investment management may work very well for giant corporate pension funds and multibillion-dollar university endowments. It has also helped millions of Americans to accumulate assets toward long-term goals, such as retirement or paying for college. But it no longer serves the interests of those individual investors who have already created wealth and are now most concerned with earning consistently attractive returns year in and year out, no matter what the market is doing.
In this book, I'm going to argue that conservative high-net-worth investors who want to be certain their portfolios will support them and their family in retirement should put significant portions of their money into hedge funds. Now, I know that at this point you may be staring at the page in disbelief. Hedge funds? Didn't this guy Owen ever hear of Long-Term Capital Management, the giant hedge fund that fell to earth in 1998, setting off a multibillion-dollar financial crisis?
Ah, yes, LTCM. I know it well. I also know something too few investors realize: LTCM is an example of one very specific and distinct segment of the hedge fund universe. Other hedge funds use completely different approaches. In fact, some hedge funds are among the most conservative investments an individual could make. As Thomas Schneeweis, a professor of finance at the University of Massachusetts at Amherst and a hedge fund expert, wrote in the Journal of Alternative Investments in 1998,
There are many lessons to be learned from LTCM: 1) diversify, 2) high return investments are also potential low return investments, and 3) trading in illiquid secondary markets is potentially disastrous in extreme market conditions. These are, of course, lessons that are true for all investments, and have nothing to do with the fact that LTCM was a hedge fund.
I also know all about hedge fund guru George Soros and his billion-dollar bets on the British pound and the Japanese yen. But what I also know are the facts and figures on myriad hedge fund strategies, and that many hedge funds have lengthy track records of generating attractive, consistent returns.
Perhaps the most important thing to know about hedge funds is that they are a bottle into which all sorts of wine may be poured. Hedge funds are not a kind of investment, but rather a mechanism for making investments in the same sense that mutual funds are a mechanism. As in the case of mutual funds, the vehicle called a hedge fund is not inherently speculative or conservative, large or small, aggressive or passive. It is simply a framework, a legal structure, through which a pool of money can be marshaled and then invested in an almost endless assortment of ways.
In the pages ahead, I will expand on why traditional, mainstream investment management has diverged from the needs of many individual investors, and I will explain why hedge funds can better provide what these investors seek. I will explore which kinds of hedge funds are best suited to helping investors achieve the kind of consistent--and consistently good--returns they need to sustain a comfortable retirement. And I will describe how individuals can invest directly in individual hedge funds or gain exposure to an array of hedge fund strategies through a fund-of-funds approach.
So, I invite you to put aside, at least temporarily, any preconceptions you may have about hedge funds, take careful note of my emphasis on conservative investing, and hear me out. I hope you'll find the case I'm going to make persuasive. At a minimum, I think you'll learn a lot about the surprising and sometimes mysterious world of hedge funds.
JAMES P. OWEN
Montecito, California
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