Despite a rising chorus of criticism about mediocre performance and high fees, the alternative investment industry in general, and hedge funds in particular, remain where Wall Street’s best and brightest money managers congregate. Yet, the business they are in, and the regulation around it, has shifted dramatically since the financial crisis and sharpened both the opportunities and the pitfalls of hedge fund management. In this issue of Modern Trader we explore not only the macro aspects of the hedge fund industry in 2016, but also look closely at some tactical concerns of particular interest to those in the field.
First, we sit down for a candid discussion with SkyBridge Capital CEO Anthony Scaramucci (see SkyBridge CEO on investment themes, manager screens & regulatory regimes, page 18) on his current investment themes, how he allocates capital and the myriad elements that make up a successful hedge fund manager, or as he puts it, “where the art and the science intersect.”
Next, we delve deeply into the due diligence process of allocating to a fund (see “Trade Secrets — due diligence beyond the tear sheet,” page 22). Although considered a simple check-the-box exercise by many, the reality is that proper due diligence takes time, a keen eye and knowing how to spot inconsistencies that might lead to key information about a fund, its managers or its strategy.
From there, we move on to the extraordinary growth of liquid alternatives, one of the most disruptive and polarizing topics in the alternative asset industry. Proponents say liquid alts provide investors with diversification and open the market for sophisticated strategies to a wider audience, while detractors cite the contradiction inherent in wrapping what can be illiquid investments with ostensibly liquid vehicles. But not every non-traditional mutual fund is a liquid alt, points out Goldman Sachs Asset Management’s Nadia Papagiannis in “GSAM’s Papagiannis on liquid alternatives” (page 26). GSAM has developed a common framework to help investors define, compare and evaluate true liquid alternative funds.
Meanwhile, activist investing has become much more visible strategy in the last few years, but concerns have been raised about the manner in which some high-profile hedge funds go about trying to increase shareholder value. Modern Trader Features Editor Garrett Baldwin looks at new legislative efforts to rein in activist funds in “Dems antidote to the evils of activist investing” (page 28). The Brokaw Act is peeled apart to show the many misconceptions and hyperbole that now surround the activist strategy, and why the Brokaw Act may not accomplish what its authors intend.
Finally, we return to SkyBridge’s Scaramucci for a rapid-fire Q&A (see “A random walk with Scaramucci,” page 34) on everything from his short list of essential business books to the 2016 Presidential election and his resurrection of Wall Street Week.