And that’s a wrap on “Hedge Fund Analysis” by Frank J. Travers.
Over the past 20 posts, we went through the entire book, from the history of hedge funds all the way to the final scoring model. Here’s what I think you should take away from all of this.
Chapter 12 is the final chapter and it is where everything comes together. After all the sourcing, screening, interviewing, number crunching, operational checks, risk reviews, and reference calls, Travers shows us how to take all that work and turn it into a single, structured decision.
Chapter 11 opens with a Reagan quote, “Trust but verify.” That pretty much sets the tone. You have spent hundreds of hours doing investment, operational, and risk due diligence on a hedge fund. But have you actually checked whether the people running it are who they say they are?
Chapter 10 opens with a Warren Buffett quote: “Risk comes from not knowing what you’re doing.” Hard to argue with that. Travers uses this chapter to walk us through the risk due diligence process, and honestly, some of the findings are pretty eye-opening.
In Part 1 we covered the big picture of operational due diligence and why so many hedge fund failures trace back to operational problems. Now in Part 2, Travers lays out exactly what to check, what questions to ask, and then shows us a real example interview with the operations team at Fictional Capital Management (FCM).
Chapter 9 is where Travers shifts from talking about investment analysis to something most people overlook: the boring operational stuff that actually prevents you from losing all your money to fraud.
In Part 1 we covered the theory behind onsite interviews. Now Travers takes us inside the actual visit to Fictional Capital Management. This is where we get to see how all those interview techniques play out in a real (well, fictional but realistic) setting.
You have done the phone calls, crunched the numbers, analyzed the portfolio. Now it is time to actually show up at the hedge fund’s office and talk to people face to face.
In Part 1 we looked at how to get portfolio data from 13F filings and started breaking down Fictional Capital Management’s long book. Now we continue with more portfolio metrics and, more importantly, the liquidity analysis that catches the fund manager in a contradiction.
Chapter 7 opens with two quotes. One from Bernard Madoff saying he can’t discuss his proprietary strategy, and one from George Soros about how it’s not about being right or wrong, but how much you make when right and how much you lose when wrong. That contrast alone tells you everything about why portfolio analysis matters.
At this point in the book, we have collected the basic info from the hedge fund manager, done an initial review, and had a phone interview. Now comes the numbers part. Chapter 6 of “Hedge Fund Analysis” by Frank J. Travers is about crunching performance data, and it is packed with formulas and statistics.
In Part 1, we watched Travers set up and begin his initial phone call with Jaime Williams from Fictional Capital Management. Now we pick up where we left off, with the conversation getting into the really meaty stuff: asset growth, liquidity, short selling, risk management, and the all-important question of what makes this fund special.
You have done your homework. You read the DDQ, you looked at the presentation, you reviewed the monthly letters, and the numbers did not scare you away. Now what?
In Part 1 we looked at what a Due Diligence Questionnaire (DDQ) is and how Travers uses it to collect initial data on a hedge fund. In this second part, we cover the rest of the DDQ, the other materials you should request, how to analyze performance data, and one of the most useful free tools out there: SEC 13F filings.
So you have narrowed your list of hedge fund candidates. You ran the screens, looked at the charts, compared the numbers. Now what?
Chapter 3 kicks off Part Two of the book, and this is where things get practical. We are done with the history lessons and strategy overviews. Now Travers rolls up his sleeves and shows us how to actually evaluate a hedge fund step by step.
Chapter 1 gave us the history. Now in Chapter 2, Travers answers the big question: what actually is a hedge fund, and why would anyone put money into one?
In Part 1, we covered the earliest roots of hedge funds, from Japanese rice traders to Karl Karsten’s statistical forecasting and Benjamin Graham’s value-oriented approach. Now we get to the person who took all those ideas and built something that actually changed Wall Street forever.
Chapter 1 of Travers’s book opens with a quote from Mark Twain: “History doesn’t repeat itself, but it does rhyme.” And then Travers immediately proves it by describing a 1970 article from Fortune magazine that sounds like it was written yesterday. Hedge funds losing money, managers getting overconfident, regulators circling. That article is from 1970. Let that sink in.
There are somewhere between 8,000 and 10,000 hedge funds out there. Let that sink in for a second. Even if you had infinite money, how would you figure out which ones are actually good?
I just finished reading “Hedge Fund Analysis: An In-Depth Guide to Evaluating Return Potential and Assessing Risks” by Frank J. Travers, and I want to break it down for you in a series of blog posts.