对冲基金管理基础（英文版）The Fundamentals of Hedge Fund Management

对冲基金管理基础（英文版）TheFundamentalsofHedgeFundManagement14102_Strachman_3p_ffirs.8><#004699'>f.qxp12/4/069:30AMPageiiiTheFundamentalsofHedgeFundManagementHowtoSuccessfullyLaunchandOperateaHedgeFundDANIELA.STRACHMANJohnWiley&Sons,Inc.14102_Strachman_3p_ffirs.<#004699'>f.qxp12/4/069:30AMPagevi14102_Strachman_3p_ffirs.<#004699'>f.qxp12/4/069:30AMPageiTheFundamentalsofHedgeFundManagement14102_Strachman_3p_ffirs.<#004699'>f.qxp12/4/069:30AMPageiiFoundedin1807,JohnWiley&SonsistheoldestindependentpublishingcompanyintheUnitedStates.WithofficesinNorthAmerica,Europe,Aus-tralia,andAsia,Wileyisgloballycommittedtodevelopingandmarketingprintandelectronicproductsandservicesforourcustomers’professionalandpersonalknowledgeandunderstanding.TheWileyFinanceseriescontainsbookswrittenspecificallyforfinanceandinvestmentprofessionalsaswellassophisticatedindividualinvestorsandtheirfinancialadvisors.Booktopicsrangefromportfoliomanagementtoe-commerce,riskmanagement,financialengineering,valuation,andfi-nancialinstrumentanalysis,aswellasmuchmore.Foralistofavailabletitles,pleasevisitourWebsiteat.WileyFinance4>>.14102_Strachman_3p_ffirs.<#004699'>f.qxp12/4/069:30AMPageiiiTheFundamentalsofHedgeFundManagementHowtoSuccessfullyLaunchandOperateaHedgeFundDANIELA.STRACHMANJohnWiley&Sons,Inc.14102_Strachman_3p_ffirs.<#004699'>f.qxp12/4/069:30AMPageivCopyright??2007byDanielA.Strachman.Allrightsreserved.PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey.PublishedsimultaneouslyinCanada.Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmittedinanyformorbyanymeans,electronic,mechanical,photocopying,recording,scanning,oroth-erwise,exceptaspermittedunderSection107or108ofthe1976UnitedStatesCopyrightAct,withouteitherthepriorwrittenpermissionofthePublisher,orauthorizationthroughpaymentoftheappropriateper-copyfeetotheCopyrightClearanceCenter,Inc.,222RosewoodDrive,Danvers,MA01923,(978)750–8400,fax(978)646–8600,orontheWebat.copyright>.RequeststothePublisherforpermissionshouldbeaddressedtothePermissionsDepart-ment,JohnWiley&Sons,Inc.,111RiverStreet,Hoboken,NJ07030,(201)748–6011,fax(201)748–6008,oronlineat//.wiley>/go/permissions.LimitofLiability/DisclaimerofWarranty:Whilethepublisherandauthorhaveusedtheirbesteffortsinpreparingthisbook,theymakenorepresentationsorwarrantieswithrespecttotheaccuracyorcompletenessofthecontentsofthisbookandspecificallydisclaimanyimpliedwarrantiesofmerchantabilityorfitnessforaparticularpurpose.Nowarrantymaybecreatedorextendedbysalesrepresentativesorwrittensalesmaterials.Theadviceandstrategiescon-tainedhereinmaynotbesuitableforyoursituation.Youshouldconsultwithaprofessionalwhereappropriate.Neitherthepublishernorauthorshallbeliableforanylossofprofitoranyothercommercialdamages,includingbutnotlimitedtospecial,incidental,consequential,orotherdamages.Forgeneralinformationonourotherproductsandservicesorfortechnicalsupport,pleasecontactourCustomerCareDepartmentwithintheUnitedStatesat(800)762–2974,outsidetheUnitedStatesat(37><17)572–3993orfax(3<17)572–4002.Wileyalsopublishesitsbooksinavarietyofelectronicformats.Somecontentthatappearsinprintmaynotbeavailableinelectronicbooks.FormoreinformationaboutWileyproducts,visitourWebsiteat.wiley>.LibraryofCongressCataloging-in-PublicationDataStrachman,DanielA.,1971-Thefundamentalsofhedgefundmanagement:howtosuccessfullylaunchandoperateahedgefund/DanielA.Strachman.p.cm.Includesbibliographicalreferencesandindex.ISBN-13:978–0-471–74852–6(cloth)ISBN-10:0–471–74852–8(cloth)1.Hedgefunds.I.Title.HG4530.S83682007332.64'5—dc222006015453PrintedintheUnitedStatesofAmerica1098765432114102_Strachman_3p_ffirs.<#004699'>f.qxp12/4/069:30AMPagev“Thedayisshort;thetaskisgreat.”EthicsoftheFathersChapterIIVerse20“Opportunityismissedbymostpeoplebecauseitisdressedinoverallsandlookslikework.”ThomasA.Edison14102_Strachman_3p_ffirs.<#004699'>f.qxp12/4/069:30AMPagevi14102_Strachman_3p_ffirs.<#004699'>f.qxp12/4/069:30AMPageviiToFelice,Leah,andJonah14102_Strachman_3p_ffirs.<#004699'>f.qxp12/4/069:30AMPageviii14102_Strachman_3p_ftoc.<#004699'>f.qxp12/4/069:29AMPageixContentsPrefacexiAcknowledgmentsxiiiCHAPTER1TheHedgeFundIndustry1CHAPTER2TheServiceProviders21CHAPTER3HedgeFundStructures37CHAPTER4HedgeFundAccounting53CHAPTER5ERISA,UBTI,andOffshoreFunds71CHAPTER6MarketingandCapitalRaising84CHAPTER7WhytheBackOfficeMatters104CHAPTER8TheLaunch116CHAPTER9PerceptionversusReality130Appendix143ix14102_Strachman_3p_ftoc.<#004699'>f.qxp12/4/069:29AMPagexxContentsResourceGuide149Notes155Glossary159Bibliography165Index16914102_Strachman_3p_fpref.<#004699'>f.qxp12/4/069:30AMPagexiPrefaceverthepastfiveyears,thehedgefundindustryhasgrownenormously.OHedgefunds,whichwereoncethoughtofasatooloftherichandpriv-ileged,arecommonplaceininvestmentportfoliosaroundtheworld.Nomatterwhatyouread,see,orhearinthepopularpress,thehedgefundin-dustryisheretostay.EveninthewakeofthecollapseofAmaranthAdvi-sors,theindustryisstrongerthaneverandhasbecomeaforcetobereckonedwithbothhereandabroad.Nowisawonderfultimetobeenteringthehedgefundindustry,foranumberofdifferentreasons.First,theindustryisprimedforgrowth;sec-ond,themarketsareextremelyvolatile;andthird,hedgefundshavecomeintotheirown,literallyonsomeoneelse’snickel,whichmeansalotoftheworkyoupreviouslywouldhavehadtodotobuildyourbusinesshasbeendoneforyou,andtheroadtohedgefundrichesisgoingtobealotsmootherthanitwas,say,fiveorsixyearsago.However,thatbeingsaid,buildingasuccessfulbusinessisgoingtotakealotofhardwork;therearegoingtobealotofdisappointingtimes;anditisgoingtobeextremelyfrustratingmoreoftenthannot.Therefore,myadviceisasfollows:Bepre-paredfortheworst,expectthebest,andbesatisfiedonsomelevelwithyoursuccess.Ibelievethattheindustryisprimedforgrowth,andwiththisgrowthIbelievetherewillbealotofquestions.Theintentionofthisbookistoan-swersome,ifnotall,ofthequestionsthatyouoryourcolleaguesmayhaveandprovideyouwithatleastafoundationforyourbusinessandtoolsthatwillenableyoutofindtheanswers.Overthepast10years,Ihavehadtheuniqueexperienceofworkingliterallyaroundtheworldwithpeoplewhoarecreating,building,develop-ing,andmarketinghedgefunds.Somearejuststartingoutandhavelessthan$1millioninassetsundermanagement;somearewell-heeledfirmswithbillionsinassetsundermanagement;othersfallsomewhereinbe-tween.Whiletheirsituationsaredifferentandinsomesenseuniquetothem,theyallhavethesamequestions,theyallneedbasicallythesamean-swers,andtheydon’thaveaplacetoturntoforadvice.Myjobistogivethemthatadvice,whethertheywanttohearitornot;myjobistotellitlikeitisandtohelpthemgettowheretheyneedtobewiththeirbusiness.xi14102_Strachman_3p_fpref.<#004699'>f.qxp12/4/069:30AMPagexiixiiPrefaceDuringthistime,Ihaveworkedwithclientsin20countriesonfourconti-nents;ithasbeenquiteawildride.Thekeyformeistobeabletosolveproblemsforthoseinthehedgebusinesswhoflywithoutanetbecausetheyarenotpartofsomeinvestmentmanagementbehemoth.Thisbookprovidesyouwithsomeofwhatyouneedtobesuccessful.Itprovidesyouwiththetoolsyouneedtomakegooddecisions,thetoolsyouneedtocreategoodplans,thetoolsyouneedtosetoutamarketingstrat-egytohelpyouraiseassets,andthetoolsyouneedtocreateaninfrastruc-turethatwillallowyoutosupportyourbusiness.Yourgoalinreadingthisbookistolearnasmuchasyoucanabouthowtooperatethebusinesssideofahedgefund.Thisbookisnotaboutmoneymanagementstrategies.Thisbookisnotaboutbuyinglowandsell-inghigh.Itisabouttheinfrastructure,thebusinessside,ofthehedgefundindustry,andIbelievethatasyoureadthefollowingpages,youwilllearnthefundamentalsthatyouneedtorunasuccessfulbusiness.Thisbookwillnotsolveallproblemsorprovideyouwitheverythingyouneedtobesuccessful;itwillgiveyouthefundamentals.Onethingyoushouldalsolookforasyougooutonyourownisamentor.Inordertobesuccessful,youneedgood,solidadvicegivers,andyouneedtobewillingtotakeadviceandlookforit.Don’tbeembarrassedortooproudtoaskforhelp.Itisokaytohavequestions—thekeyisfindinganswers.Thisbookthatyouhavepurchasedshouldbeviewedasagreatre-sourcetool.Itshouldbesomethingthatyouusetimeandtimeagaintohelpyouunderstand,dealwith,andoperateyourbusinessmoreefficientlyandsuccessfully.Ihopeyouwillgetasmuchjoyfromreadingandreread-ingitasIhavefromwritingit.AsIsaymorethanoncethroughoutthesepages,ifyouhaveanyquestionsaboutanythingthatyoureadinthisbook,orifyouhaveissuesyouwanttodiscuss,youcanalwayssendmeane-mailatdas@hedgeanswers>.Thanksforpurchasingthisbook.Ihopeyouenjoyit.14102_Strachman_3p_flast.<#004699'>f.qxp12/4/069:30AMPagexiiiAcknowledgmentsheideaforthisbookcameaboutthroughaseriesofe-mailsbetweenmyTeditorandmeduringthelastfewweeksof2004.Sincethattime,Ihavespentanenormousamountoftimetryingtofigureoutwhatmakesahedgefundsuccessfulandwhatcausesahedgefundtofail.AndalthoughIhaveyettofindempiricalevidencethatdefinessuccessandfailure,Ibelievethat,inthepagesthatfollow,Ihaveprovidedyouwitharoadmapthatwillal-lowyoutoavoidfailureandtosucceed.Yourinterestinhedgefundshasmadethisbookpossible.Ithankyouverymuchforyourinterestinthisfas-cinatingsubject.IwrotethesecondeditionofGettingStartedinHedgeFundsbecausetheseuniqueinvestmentproductsareheretostay.Theyarenolongercon-sideredan“alternative”investmentvehicle,butratheranimportantpartofadiversifiedportfolio.And,whilehedgefundshavenotyetbecome“tradi-tional,”inthemonthsandyearsaheadthecharacteristicsthatseparatetra-ditionalinvestmentsandhedgefundsaregoingtobecomesmallerandsmaller.Hedgefundsarenotgoingtodisappearbecausepeopleunderstandthevalueofcreatingaportfoliothatishedgedagainstmarketvolatility.Hedgefundsareforinvestorsofallshapesandsizesandplayanimportantroleinthefutureofthefinancialmarkets.Asinthepast,towritethisbookIhavecalledonmanyoftheusualsuspectswhohavehelpedmeovertheyearslookgoodinprint.Ithasbe-comemoreandmoreevidenttomethatthereisnothingmoreimportantthantohavegoodpeopleatyourside.Thesepeoplearebetterthangood,andwithoutthemIwouldnotbeabletogetmyworkdone.Theyare,ofcourse,VikiGoldman,thegreatestlibrarianandresearcherIhaveevermet,andSamGraff,theonlytruenewspapermanleftinthetristatearea.Thankyouforyourhardworkandforalwaysmakingmyworkbetter.Itrulyap-preciateeverythingyoudoforme.SpecialthanksalsotoChristineEnners,whocamethroughwiththelogisticalsupporttomakethisbookareality.ThepeopleatWileyhaveonceagainprovidedmeaplatformformywork.Toallofthem,Isaythankyou.Ihopethebookisallyouintendedittobewhenyougavemethego-aheadtowriteit.Iwanttothankmyfamilyfortheirsupportandguidanceovertheyears.Itisthroughyoureffortsthatthisbookispossible.xiii14102_Strachman_3p_flast.<#004699'>f.qxp12/4/069:30AMPagexivxivAcknowledgmentsAndtomywifeFelice,allIcansayisthankyouforbeingaproviderofinspirationandsupporttoseethisandalloftheotherprojectsthroughfromstarttofinish.DanielStrachmanFanwood,NewJerseyNovember200614102_Strachman_3p_c01.<#004699'>f.qxp12/4/069:33AMPage1CHAPTER1TheHedgeFundIndustryhegrowthofthehedgefundindustryoverthepastfiveyearsistrulyTamazing.Manyindustryobserversbelievethatsincethedawnofthenewmillennium,assetsintheseoften-calledsecretiveinvestmentvehicleshasgrownfourfold.Ifyoufactorinthenumberoffundsoffunds,thegrowthfactorisprobablyclosertofivefold.Theindustrycontinuestogrowatarecordpace,evenwiththeweakperformancenumbersin2005andthedecreaseinassetinflowsinthefirstquarterof2006.Accordingtoonepublishedreport,2,073hedgefundswerelaunched1in2005,upfrom1,435in2004.Asofspring2006,thereareanestimated212,000hedgefundsinoperationglobally.Thenumbersareshockingandquitecompelling,especiallyifyouareworkingataserviceprovider.Someintheindustryequatethesubstantialgrowthinhedgefundsoverthepastfiveyearstowhathappenedinthemutualfundindustryinthelate1980sandearly1990s.Theresultwasanindustrythatcontractedinlightoftheburstingtechnologybubbleandbearmarket.Manybelievethatasthehedgefundindustrycontinuestogrow,itisreadyingitselfforabursting,ofsorts.Therefore,asthenewmanagerontheblock,youneedtobereadyforwhatliesahead,because,quitefrankly,itdoesnotlooksopretty.Thatbe-ingsaid,thestrongwillsurvive,andtheywillprosper.Yourjobasanewmanagerabouttolaunchafundistomakesurethatyouareready,willing,andabletodealwitheverythingthatthemarketandinvestorsthrowatyouandthatyouarepreparedfortheworst.Tounderstandwheretheindustryisgoing,youneedtofirstunderstandwhereithasbeen.TheevolutionofthehedgefundindustryisbestseenbycomingoutoftheWallStreetsubwaystop.Whenyouexitthestation,headnorthwesttowardBroadwayandmakeaquickleftonBroadStreet:InfrontofyouwillbetheNewYorkStockExchange,behindyouwillbetheformerheadquartersofJ.P.Morgan,andtoyourleftwillbeastatueofPresidentGeorgeWashington.Ifyoumakethistriparound9:00A.M.,youwillseeexactlywhatAlfredWinslowJonessaw—tradersandbrokershustlingtogetinsidethebuilding114102_Strachman_3p_c01.<#004699'>f.qxp12/4/069:33AMPage22THEFUNDAMENTALSOFHEDGEFUNDMANAGEMENTbeforethemarketopens.ItwastheactionandexcitementofthisplacethatledJonestocreatethefirstknownhedgedfund,aninvestmentvehiclethatwentlongandshortthemarketandwasabletoprotectandgrowitsin-vestors’assetsregardlessofmarketconditions.Jones,asociologistturnedjournalist,cameupwiththeconceptofthislong/shortfundbasedonathesishehadwrittenforanarticleinFortunemagazine.Inthelate1940s,Joneshadheldanumberofpositionsinjournalism,writingaboutfinanceandindustryaswellassocialissues.Duringthistime,herealizedthattheincomeheearnedasafreelancerwasnotgoingtobeenoughtosustainhimorhisfamilyinthelifethatheexpectedandwanted.HelookedtoWallStreetfortheanswer.Whathefoundwasanideathathebelievedwouldwork.Inturn,hewouldearnenoughmoneytosupporthisfamilyandtofulfillhismajorpassion—helpingpeople.WhileJonesclearlydevelopedhisconceptandhisbusinessforthemoneyitearnedhim,hisideawastotakethewealthandputittoworkinthecommunity.Hisideawastousehishedgedfundasatoolforotherstohelpthemselves.Hisson-in-law,RobertBurch,whocurrentlyrunsA.W.Jones&Companywithhisson,saidthatJoneswasmoreinterestedintheintellectualchallengeofthebusinessthantherewardsthatitprovided.“JoneswasnotamanthatwasveryinterestedinWallStreet,”saidBurch.“Althoughhemadealotofmoneyovertheyears,hegavequitealotofitawayinordertocreateprogramsandorganizationstohelppeoplehereintheUnitedStates.”Joneswasnotinterestedintalkingaboutthefund,howitworked,orwhatitdid;hewantedtotalkabouthowtomakethecountryandtheworldabetterplace.“WhenyouhaddinnerwithJones,youalwayshadfourorfiveguysfromvariouspartsoftheworld,”recallsBurch.“Youdidn’tknowifthatnightyouweregoingtodiscusssomependingrevoltinAlbaniaorwhatlanguagetheyspeakinIran.Butwhatyoudidknowwasthatyouwoulddefinitelynotbetalkingaboutmoney,WallStreet,orthefirm.Hismindwasbeyondthat.”Thefoundationofthehedgefundindustrylaynotinthepursuitofmoneyforconspicuousconsumptionbutinthepursuitofmoneytohelppeople.Itallbeganinamagazine.Thearticlewasnotsomehow-toorget-rich-quickpieceaboutmakingafastbuck,butratherathought-provokinglookathowmoneyismanagedandtheideathatgoinglongsomestocksandshortotherscanearngreatandstablerewards.Inshort,theJonespiecelookedathowyoucouldgolongabasketofstocksandshortabasketofstocksandstillprotectandgrowyourassets.14102_Strachman_3p_c01.<#004699'>f.qxp12/4/069:33AMPage3TheHedgeFundIndustry3Thearticlethatputhisplaninmotionwastitled“FashioninForecast-ing,”whichranintheMarch1949issueofFortunemagazine.Itgavehimthefoundationforwhattodaysomepeople6><#00aa00'>viewasoneofthemostimpor-tanttoolsusedbymoneymanagerstoactuallymakemoney.Followingisanexcerpt*fromthearticle:ImagerightsnotavailableTheideawassimple:Somestocksgoupwhileothersgodown,andveryrarelydoallstocksmoveinthesamedirectionatthesametime.Ifthismakessensetoyou,thenthenextthingyouneedtounderstandisthatassomestocksmoveupandothersmovedown,thereisawaytomakemoneybothwhentheygoup,bybeinglongabasketofstocks,andwhentheygodown,bybeingshortabasketofstocks.Thekeyistofore-castwhichstocksgoupandwhichgodownandtopositionaportfolioaccordingly.*??1949TimeInc.Allrightsreserved.14102_Strachman_3p_c01.<#004699'>f.qxp12/4/069:33AMPage44THEFUNDAMENTALSOFHEDGEFUNDMANAGEMENTTheissuethenwasnodifferentthantheissuetoday:Howdoyoude-terminewhichstocksaregoingtogoupandwhicharegoingtogodown?Joneshadauniqueproblem.Hewasnotastockpicker.Fortunately,helearnedthisearlyonandwasabletocompensateforhisinabilitytopickstocksbyhiringthosewhocould.“Myfatherwasagoodsalesman;heknewpeopletoraisemoneyfrom,andwasagoodorganizerandadministrator.Butwhenitcametopickingstocks,hehadnoparticulartalent,”saidTonyJones.“Thismeantthathisjobwastofindpeoplewhodidhavethetalent.”AlfredWinslowJoneswasanexecutive,notastockpicker.Heunder-stoodhowtogetthingsdoneandhowtofindpeopletoexecutehisideas.Intheend,hecreatedthefirsthedgefund—andwithitanentireindustry.Some50-oddyearslater,inthefallof2003,areportbytheSecuritiesandExchangeCommissionestimatedthattherewere6,000to7,000hedgefundsmanagingbetween$600billionto$650billioninassets.Thereportnotedthathedgefundassetswereexpectedtogrowtomorethan$1tril-4lionbetween2008and2010.Jonesneversawthiscoming.Hebelievedthathisbusinessdidnothavelegs,eventhoughitwassuccessfulandeventhoughhisconceptworked.Inoneofthefewprofilesofthefounderofthehedgefundindustry,Jonesisquotedassaying,“Idon’tbelievethatit[thehedgefund]isevergoingtobecomeasbigapartoftheinvestmentsceneasitwasinthe1960s.The5hedgefunddoesnothaveaterrificfuture.”Jonesseemedtohavemisunderstoodthevalueofhisinventionbe-cause,asmanypeoplerealize,havingaportfoliothatisbothlongandshortistheonlywayoveralongperiodoftimetoensurethattheirassetsareprotectedandgrowregardlessofwhetherthemarketrisesorfalls.Whileaportfoliooflongsandaportfolioofshortsmakesense,thekeytolong-termsuccessisnotjusttohittheballoutoftheparkwithyourstockpicksbuttoputupsinglesanddoubleseachandeveryday.Movetherunnersaroundthebasesandbacktohomeplatewhileprotectingyouras-setsatallcoststomakesureyoulivetofightanotherday.That,myfriends,isthesecretofsuccessfulhedgefundbusinesses,anditallowstheseorgani-zationstomaintainandcreatewealthinasafeandsecureenvironment.UNDERSTANDINGHEDGEFUNDSTheideaofthisbookissimple.Itprovidesyouwiththetoolsyouneedtounderstandthefunctionsthatgointocreating,launching,andrunninganinvestmentvehiclethatisahedgefund.Itprovidesyouwithinformationtomakebetterdecisionswhenchoosingalawyer,primebroker,accountant,14102_Strachman_3p_c01.<#004699'>f.qxp12/4/069:33AMPage5TheHedgeFundIndustry5administrator,andotherserviceproviders—thepeoplewhowillhelpyougrowandmaintainyourbusiness.Itprovidesyouwithinsightintotheper-ceptionsversustherealitiesofthehedgefundbusiness.Andmostofall,itgivesyouaclearunderstandingofwherethehedgefundindustrycamefrom,whereitisnow,andwhereitisgoing.Inthisway,youandyourpart-nerscancreateandrunasuccessfulbusinessthatallowsyouandyourin-vestorstobuildandpreservewealth.Thisbookisnotaboutmanagingmoneyorimplementingtradingstrategies.Thatiscoveredinother,morethought-provokingbooksaboutmoneyandmarkets.Thisbookisatool—areferenceguide,ifyouwill—thatwillbeusedbyyourfront-,middle-,andback-officepersonnel.Itwillbeusedwhenyoudecidewhatsortoffundstolaunch,howtheyshouldbestructured,whoyoushouldchooseasalawyerandprimebroker,amongothers,andmostimportant,whoyourfundscanbemarketedto.Ifyouwanttolearnabouttrading,stopreadingrightnow.Withthatsaid,wenowneedtolookathedgefundbasicsinordertofigurehowtogetstartedondevelopingandrunningasuccessfulbusiness.Thebasicsare,quitehonestly,verybasic.Onethingthatneedstobesaidupfrontisthathedgefunds,likemostthingsonWallStreet,arethoughttobeveryintricate,confusing,andsophisticated.Thisisjustnotthecase.Hedgefunds,likemosteverythingelseontheStreet,arequitesimplewhenyoubreakthemdownandquiteeasytounderstandonceyoulookatthemcloselyanddissecttheminanorderlyandefficientmanner.Someaspectsoftheindustryaresophisticated,includingstructuringfortaxefficiencyandlegalissues,butforthemostpart,onceyouhavedoneitthefirsttime(i.e.,setupahedgefund),itislikeridingabike:Youneverforgethowitworksandwhatneedstobedone.Althoughinvestorsmayinitiallyassumethathedgefundsandmutualfundsoperateinasimilarfashion,inrealitytheonlysimilaritybetweenthefundsisthatbothoperateaspooledinvestmentvehicles.Thismeansthatanumberofinvestorsentrusttheirmoneytoamanagerforaspecificfundthatgoesoutandbuysandsellssecuritiesinordertomakeaprofit.Hedgefundsdifferfrommutualfundsinthatinvestorsprovidehedgefundmanagerswiththeabilitytopursueabsolutereturnstrategies.Mutualfundsgenerallyofferonlyrelativereturnstrategies.AnabsolutereturnstrategyisthenewnameforthestrategythatJonesinventedinthelate1940s.Itmeansthatregardlessofmarketconditions,ahedgefundmanagerwillmakemoney.Thisdiffersfromwhatiscalledarelativereturnstrategy,whichishowonefunddoesagainstabenchmark.Inrecentyearstherehavebeenanumberofindicescreatedtotrackandbenchmarkhedgefunds.Whiletheseproductsaregood,theyarenotflaw-less.Therefore,itisbesttothinkofhedgefundsasvehiclesthatare14102_Strachman_3p_c01.<#004699'>f.qxp12/4/069:33AMPage66THEFUNDAMENTALSOFHEDGEFUNDMANAGEMENTmeasuredontheirspecificperformance,notonhowtheirperformanceisrelativetotheS&P500IndexortheLipperSmallCapIndexoranyotherbenchmarkusedtomeasureperformanceoftraditionalinvestments.Mutualfunds,duetotheirstructureandthelawsthatgovernhowtheyoperate,investinapredefinedstyleandstrategiessuchaslarge-capgrowthandmid-capvalueoraparticularsectorsuchastheutilitiesorbiotechnol-ogy.Themutualfunddefinesitsstrategyandstyleinitsprospectus,whichisgiventoexistingandprospectiveinvestors.Managerperformanceismea-suredonhowafund’sreturncomparestothatofaspecificindexorbench-mark.Forexample,ifyoubuyintoalarge-capvaluefund,themanagersofthatfundtrytooutperformtheS&P500Index.Mostmutualfundmanagersconstructportfoliosbyusingtheirstock-pickingskillstocreateaportfoliothattheybelievewillperformwellovertimeandinturnprovidethemwithanedgeovertheindex.Alltheyneedtodoistooutperformtheindexbyafewbasispointsandtheyaredeemedtobegoodatwhattheydo.Thatbeingsaid,mutualfundmanagershaveonegoalinmindwhentheymanagetheirmoney:beatingtheirrelativeindex.Iftheindexisdown10percentwhilethemutualfundisdownonly7percent,thefund’sperformancewouldbecalledasuccess.Thepresswouldanointthesemanagersasheroesofthemoneymanagementindustryandtheywouldbedeemedtobe“expert”stockpickersbecausetheybeattheirrela-tivebenchmark.Theproblemis,asaninvestor,youcan’teatrelativere-turns.Intheprecedingscenario,youwouldhavelost7percentofyourinvestment,plusfees,totheseheroes’“expertability”topickstocks!Hedgefundsarecompletelyopposite.Hedgefundsaremanagedtoseekpositiveabsolutereturns,regardlessoftheperformanceofanindexorsectorbenchmark.Unlikemutualfunds,whicharelongonly(meaningtheyareabletomakeonlyabuyorselldecision),ahedgefundisabletoimple-mentmoreaggressivestrategiesandputonpositionsthatincludeshortsell-ing.Managersmayalsoemployderivativesinstruments,suchasoptions,anduseleveragetoenhancetheportfolioandaddtothepositiveperfor-manceofthebottomline.Duetotheirabilitytoshort,manybelievethathedgefundsaremorepopularinbearmarketsthaninbullmarkets.However,in2005thiswasnotthecase.Forthemostpart,hedgefundsperformedquitepoorlyforthe11monthsendingNovember30,2005,andekedoutonlysingle-digitposi-tivenumbersforthemonthofDecember.Thismeantthatnumbersfortheyear