Investment process for hedge funds #3 Monitoring
Suppose that you could successfully invest in a hedge fund you were looking for. Though, it is too early to enjoy the ride.
Without monitoring how well the fund performs, you will face unexpected risk and lose money in the investment.
If you are an individual investor, who can invest their money long term, and be responsible for anything that happens to the investment, you can accept any result from the investment. You can do this without even monitoring the investment.
Though, fiduciary duty seriously requires a periodical monitoring because of “style drift” and/or sudden underperforming fatally affects the investors and fund houses that invest in that specific fund.
Historically, some players such as Amaranth and LTCM, went bankrupt. The former invested in strategies it had few experience and the latter applied too much leverage until it was broken.
So, monitoring is a very important investment process during the investment tenure.
Also, we must pay attention to fund managers’ individual status change such as resignation, marriage/divorce and burnout, etc. which affect significantly the performance of the fund. Hedge funds, which always seek alpha as a result, should be sensitive to said occurrences.
Information like this is often heard later. There is a case that resignation already happened months ago before we even hear about it. Unfortunately, this is not limited to the hedge fund industry.
All in all, periodical monitoring of funds and fund managers is a very important investment process in order to protect funds’ performance and fund managers’ reputation.