This early morning while working at my desk, reading the wires and the blogs to make sure I was up on the day’s news, I heard from my trusty television – which is tuned automatically to CNBC and the Discovery Channel – the “true” difference between hedge funds and private equity funds. According to a talking head, private equity funds are around for such a long time that is hard for them to be fraudulent. Hedge funds, on the other hand, are comparatively new so it is easy for them to be fraudulent.
This is complete nonsense. It is truly nothing more reporting run amok. The idea that the length of time or duration of a fund is a way to measure fraud or potential for fraud is simply ludicrous. Once again the “pros from Dover” have got it wrong. Fraud can happen and does happen in all investment vehicles; it appears in stocks, mutual funds, hedge funds and private equity funds. If people want to pull one over on you, they will try. The key is due diligence.
As a budding hedge fund manager, you need to be ready, willing and able to participate in detailed due diligence exercises by potential investors. It is important to answer questions succinctly and truthfully. It may sound trite but honesty is the best policy and in this day an age, more so perhaps than ever before, it is what is needed at all times with investors. Tell them the truth and you will have nothing to worry about.
Last week I gave my semi-annual class on Hedge Funds at the New York Society of Security Analysts. During the day-long seminar, one of the guest speakers, who operates a fund of funds, talked about the due diligence process he and his team use when evaluating managers. The number one thing they find is `that people lie about is their education. If the manager lies about something as basic as his education, imagine what else he is lying about!
Therefore, tell the truth, no matter how awful it may seem; it is always better to be straight up from the start. You really have no choice.