Why Hedge Funds Fail…Plus Tips on Avoiding Failure

Hedge Funds

The average hedge fund manager makes 3X more than any other type of fund..

Part of the reason might be because hedge funds are usually more likely to fail than any other kind of fund.

Why is that?!

Hedge funds use options, leverage, shorts-selling, and other investment strategies to achieve higher returns. It’s risky, but the returns can be so worth it.

However, hedge-funds are definitely a two-edged sword… the can have the biggest gains, yet the most significant losses.

Keep in mind: We don’t mean to deter you from starting your fund at all! We just want to give you a couple reasons why they could fail, so you don’t fall into those same pitfalls!

Don’t Miscalculate the Costs!

The first mistake beginning hedge fund managers make is under-preparing for their costs.

They don’t cover their expenses!

Operational costs, such as transaction fees, margin requirements, and paying administration, are NOT adequately anticipated! Fund managers under-estimate how much it is going to cost.

Pro tip: To avoid this, fund managers are recommended 2 years of cash runway before starting.

Think about it: you could go out and get real estate with high interest, no payment down…but unforeseen problems are bound to come!

Just make an adequate budget, leave enough for unexpected costs, and you’ll be fine!

Betting big

While underestimating can be a problem…OVERESTIMATING is just as big of a problem!

Sometimes fund managers over assume their positions. Don’t fall into the trap!

Long term capital management example: The founders were trading 30 year bonds against 29.75 Russian bonds. They went all in and had $21.5 BILLION locked in…all dependent upon the market.

And…you guessed it. Market crashed, they were long on the 29.75, and had to cover their shorts. Almost immediately they lost over 44% of their assets immediately.

To make up for the massive losses, the government, along with other hedge fund managers stepped in to buy out positions to avoid a complete market failure.

Don’t over assume your positions.

Always have a back-up plan.

You can’t avoid risk…but you can prepare for it!

You can’t predict the unpredictable. A successful hedge fund takes a manager that’s willing to take educated risks, but overconfidence could break your fund.

If you want more stories like this one about fund managers, a great read is “More Money Than God.”

One Shot

Final thing to be aware of: As a hedge fund manager you’ve pretty much got one shot.

You have one opportunity to show that you know what you’re doing. If you know you can get those returns, then this isn’t a problem!

BUT you are vulnerable. Remember, because hedge funds usually have shorter lockup periods…. if you have a bad year, investors can take their money and run

Pro tip: Make sure to have your fund documents in place! If you follow EXACTLY what the documents say, you’ll be safe.

Keep your investors up to date, provide them with a return, and you’ll be fine!

But 9 times outa 10, its worth it.

Being aware of these possible stumbling blocks is crucial in your success as a fund manager!

But the game is still going! And and can make you so much money. The fund game really is the best game to get into.

You can start down that road today! If you have any questions feel free to reach out.

Thanks for the read!

Bridger Pennington

DISCLAIMER: This content is for educational and informational purposes only. It is not to be taken as tax, financial, or legal advice. You should always consult a legal professional before taking action. Furthermore, this is not a recommendation to buy or sell any security. The content is solely just the opinion of the authors.

Leave a Reply