Starting a Hedge Fund

15 Common Hedge Fund Mistakes (Part 6)

Written by Bobby Jan for Gaebler Ventures

To err is human. Hedge fund entrepreneurs are human, so they make mistakes just like the rest of us. This article completes our series on common mistakes hedge fund entrepreneurs make.

In previous articles in this series, we listed the 15 common mistakes made by hedge fund entrepreneurs and discussed mistakes 1 through 12.

In this final article in the series, we turn our attention to the last three mistakes.

  • Mistake 13. Portfolio manager is afflicted by high return tunnel vision.
  • Mistake 14. Manager fails to manage personal stress.
  • Mistake 15. Hedge fund entrepreneur begins with unrealistic goals

Hedge Fund Mistake #13: Portfolio Manager Is Afflicted By High Return Tunnel Vision.

A common mistake hedge fund portfolio managers make is to chase high returns at the expense of their fiduciary duties. Often, higher returns can only be achieved by taking on higher risks. Inexperienced managers might take on excessive risks given the risk level expected by clients.

Hedge Fund Mistake #14: Managers Fail To Manage Personal Stress.

Managing a hedge fund is a highly stressful job. Hedge fund entrepreneurs are constantly stressed about fund performance, facing client pressures, market uncertainties, regulation compliance, and administrating the fund.

Many hedge fund entrepreneurs start their fund with the money of friends, family, and close associates. Entrepreneurs who follow this course are cautioned of the risks of damaging personal relationships and the burden of stress that comes with managing the money of those whom they have a close, personal relationship with. It is not uncommon for hedge fund managers to succumb to such pressure so it is important to manage personal stress by carefully choosing clients and partners.

Hedge Fund Mistake #15: Hedge Fund Entrepreneur Begins With Unrealistic Goals.

Many hedge fund entrepreneur wannabes are motivated by what they read in the newspapers: hedge fund managers taking home multi-billion dollar incomes and outsized returns achieved by some funds.

The truth is most hedge funds do not survive and most do not achieve spectacular returns.

Starting a hedge fund can be very expensive. If the expense as a percentage of the total assets of the fund is too large, you may never earn enough to justify the expense. If your fund is not large enough, you may not be able to earn enough to support yourself as a full time fund manager. It is important to start a hedge fund with realistic expectations.

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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