Castle Hall Alternatives: Hedge Fund Investing in a New World
Five questions for investors and managers
The credit crisis which first began in mid 2007 – with the failure of a hedge fund managed by Bear Stearns — has now accelerated to create the most severe financial market dislocation since the Great Depression. It goes without saying that, after the events of the past 18 months, markets will not be the same: both investors and money managers will face a “New World”.
The hedge fund industry will not be immune: while some hedge funds have performed well, many have faltered and some have failed spectacularly. Curren market events will unavoidably lead to a re-evaluation of the hedge fund model and, in the short term, a contraction of industry capital. This is not to say that hedge funds will not remain integral to diversified, institutional portfolios, and we expect investors to retain confidence in the long-term validity of alternative investment strategies. Indeed, a period of retrenchment may be helpful: after the astonishing growth of hedge fund assets over the past five years, the current environment gives the opportunity to adjust, refine, and over time create a stronger and more stable industry.
Going forward, investors will be more rigorous and systematic in their hedge fund selection and due diligence process. Irrespective of the manager under consideration, it will no longer be possible to rely primarily on manager reputation and historical track record. Operational Risk will also become a greater concern as investors grapple with a multitude of non-investment issues ranging from counterparty risk management to the use of withdrawal gates and provisions to suspend redemptions.
Castle Hall Alternatives is one of the industry’s leading providers of operational due diligence, working with a group of leading institutions, endowments and fund of funds. In addition to completing due diligence on several hundred hedge funds worldwide, Castle Hall also publishes a regular commentary on Operational Risk entitled Risk Without Reward. Current events prompted us to review our posts over the past year and, while we have touched on numerous issues, several common themes emerge. We have distilled these themes into five questions which, we believe, are of relevance to both investors and managers in this New World.
Download full report (PDF, 600K)
The hedge fund industry will not be immune: while some hedge funds have performed well, many have faltered and some have failed spectacularly. Curren market events will unavoidably lead to a re-evaluation of the hedge fund model and, in the short term, a contraction of industry capital. This is not to say that hedge funds will not remain integral to diversified, institutional portfolios, and we expect investors to retain confidence in the long-term validity of alternative investment strategies. Indeed, a period of retrenchment may be helpful: after the astonishing growth of hedge fund assets over the past five years, the current environment gives the opportunity to adjust, refine, and over time create a stronger and more stable industry.
Going forward, investors will be more rigorous and systematic in their hedge fund selection and due diligence process. Irrespective of the manager under consideration, it will no longer be possible to rely primarily on manager reputation and historical track record. Operational Risk will also become a greater concern as investors grapple with a multitude of non-investment issues ranging from counterparty risk management to the use of withdrawal gates and provisions to suspend redemptions.
Castle Hall Alternatives is one of the industry’s leading providers of operational due diligence, working with a group of leading institutions, endowments and fund of funds. In addition to completing due diligence on several hundred hedge funds worldwide, Castle Hall also publishes a regular commentary on Operational Risk entitled Risk Without Reward. Current events prompted us to review our posts over the past year and, while we have touched on numerous issues, several common themes emerge. We have distilled these themes into five questions which, we believe, are of relevance to both investors and managers in this New World.
Download full report (PDF, 600K)
