Starting a Hedge Fund

15 Common Hedge Fund Mistakes (Part 2)

Written by Bobby Jan for Gaebler Ventures

There are certain errors hedge fund entrepreneurs tend to make. This article, the second in a series of six articles, continues our discussion on some common mistakes hedge fund entrepreneurs make.

In the first article in this series, we listed the 15 common mistakes made by hedge fund entrepreneurs and discussed the first mistake in detail.

Now, let us discuss mistakes 2, 3, and 4:

  • Mistake 2. Manager fails to monitor and communicate with clients.
  • Mistake 3. Fund has poor marketing plans.
  • Mistake 4. Fund tries to appeal too many types of investors.

Hedge Fund Mistake #2: Manager Fails To Monitor And Communicate With Clients.

Hedge fund managers must be sensitive to clients' changing needs and to maintain a stream of communication that reflects the manager's awareness of the clients' needs.

Best practice for investment professionals is to gain and regularly update their knowledge of clients' investment objective, investment sophistication, tax situation, holding period, and a variety of additional factors.

All too often, poor communication is maintained between the manager and the client-contact staff. Failure to monitor and communicate with clients may result in poor asset/client retention.

Hedge Fund Mistake #3: Fund Has Poor Marketing Plans.

Hedge fund entrepreneurs must navigate a complicated terrain of regulations and restrictions when it comes to marketing their hedge funds.

To make marketing even more difficult, hedge fund consumers are a diverse and picky lot.

The target market of your fund will depend on your investment philosophy, strategy, and expected risk and return. For example, high risk and high returns fund will appeal to investors who are looking to enhance returns while low risk, low returns, and low market correlations often appeal to pension and endowments.

When you lack track record or size, usually only friends, family, and other close associates are interested in investing.

Hedge fund entrepreneurs should have a clear marketing plan to meet these challenges.

Hedge Fund Mistake #4: Hedge Fund Provides Different Returns To Different Clients.

Although hedge funds compare favorably with other funds when it comes to providing equal returns to clients, it is important to maintain proper communications with clients who are not satisfied with relative returns within the hedge fund.

Inherently, differences occur due to differences in holding periods, tax situations, etc. Preferential hedge fund fees may also result in different net returns (i.e. negotiated fee structure with large fund of funds).

In any case, clients should be advised of the reasons behind such differences in order to avoid unnecessarily tension.

More Hedge Fund Management Mistakes

In the next article in this series, we will discuss mistakes 2, 3 and 4. It's time to read the next article if you're ready to read about a few more mistakes hedge funds make.

Cheng Ming (Bobby) Jan is an Economics major at the University of Chicago who has a strong interest in entrepreneurship and investing.

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