How to Drive a Hedge Fund: Performance
In the hedge fund space, everything hinges on your numbers. Are you up or down this month? What’s your YTD? MTD? Those are always the first questions to be asked. Sure the low beta and low volatility are important factors in attracting investors. Some are looking for diversity, others are looking for a specific sector but what really makes or breaks a deal is whether or not the investors believe you can make money for them.
I’ve found through my short time at IGP that those monthly or yearly figures are the key to whether you succeed or fail. If performance suffers, the investment team has to reevaluate the portfolio again. They must decide whether to cut the underperformers (“these guys have cause us enough pain, let’s cut our losses while we can”) or keep them, thinking: “well, they’ve already gone down this far, how much more can they possibly lose”. Either case can end in disaster or a win and the investment team will have to own the results one way or the other.
On the business development side, raising capital can be made impossibly difficult or insanely easy, depending on our performance. If we are soaring with higher than expected returns, the investors will catch wind and come to us, begging to invest, doing our work for us. On the other hand, if performance suffers dramatically, we’ll turn toxic. Investors would flee from us like a plague and I wouldn’t blame them. I don’t want my money to vanish in a bad investment either.
Last Friday (June 30) was the end of the month, quarter, and half year. Yeah, it was a huge day for us. Throughout the day, I could feel the anticipation and excitement in the air as if it was a tangible presence. The thought occurred to me that it was kind of silly to see grown men hop around with anxiety on the announcement of just a few small numbers. However, that is the game we are in. Even the best of the best funds can face catastrophe with loss of performance. It was exhilarating and dreadful at the same time. I loved it!