Twenty-five posts. That is what it took to retell this book. And honestly, when I started this series back on February 4th, I was not sure I would finish it. A post a day for almost a month is a lot. But here we are.
So after all the chapters, all the experiments, all the arguments back and forth, Burton and Shah finally ask the big question. Who wins? Is the market efficient or not? Time for a new theory entirely?
Can you grow a stock market bubble inside a classroom? Not a metaphor. An actual bubble where prices rise above what everyone in the room knows the thing is worth?
You know all those behavioral biases we talked about in earlier chapters? Loss aversion, status quo bias, overconfidence. The big question hanging over all of them is simple. Where do they come from? Are we born with them? Did we learn them from our parents and culture? Or is there something deeper going on inside our actual brains?
Try selling your house by tomorrow. Not in a month, not after listing it and staging it and waiting for offers. Tomorrow. For cash.
Stocks make more money than bonds. Everyone knows that. But here’s the thing. They make way more money than bonds. And when economists tried to explain why the gap is so big, they couldn’t. Not with their standard models. Not even close.
What if I told you that the day of the week affects your stock returns? Or that one specific month is consistently better than the other eleven? Sounds like astrology for finance people, right?
We’ve reached the end of our retelling of Cyril Demaria’s “Introduction to Private Equity, Debt and Real Assets.” It’s been quite a journey—from Christopher Columbus to multi-billion dollar mega-funds.
Every trader has said something like this at some point: “The stock has good fundamentals, it’s cheap, but the price action looks terrible. I’m going to wait.”
Benjamin Graham is probably the most famous contrarian investor who ever lived. Together with David Dodd, he invented what we now call value investing. The whole idea is simple. Buy stocks that other people don’t like. Stocks with low prices compared to their earnings or book value. Cheap stocks. Unpopular stocks.
In 1992 two economists published a paper that accidentally shook the foundations of modern finance. They did not mean to. They were actually trying to defend the system. But what they found in the data was so clear and so stubborn that it changed how everyone thought about stock prices.
You ever played the Madden NFL video game? For years, EA Sports put a top player on the cover. And then something funny kept happening. The cover athlete would have a terrible next season. Injuries, bad stats, team losses. Fans started calling it the Madden Curse. Some players actively tried to avoid being on the cover.
Every day you make decisions based on past data. What to eat for breakfast. How to approach your boss with a question. You look at what happened before and try to predict what will happen next.
People are sticky. Not physically. Mentally. We stick to whatever we already have, whatever is already happening, whatever is the default. And this stickiness costs investors real money every single day.
You know that feeling when you buy a stock right after seeing a scary headline, and then two weeks later you wonder what you were thinking? That’s a perception bias doing its work on your brain.
We’ve talked about history, but let’s get into the real engine of private equity: the entrepreneur.
Cyril Demaria makes one thing very clear: without entrepreneurs, private equity has no reason to exist. The entrepreneur is the one who takes a bunch of separate pieces—time, money, ideas—and turns them into something way bigger than the sum of its parts.
You know that feeling when you lose a $20 bill on the street? It ruins your whole afternoon. But finding $20 on the street? Nice, sure. You smile for maybe five minutes and forget about it.
Economics has a favorite character. The Rational Man. He always knows what he wants. He always picks the best option. He never panics, never gets confused, never makes a dumb choice because he’s tired or emotional.
I’ve spent over 20 years in IT and a lot of time looking at charts and numbers. One thing I’ve learned is that the math is often the easy part. The hard part is the gray matter between your ears.
You ever watch financial news and hear someone say “the market broke through resistance” or “the market looks tired”? These phrases sound like the market is some living creature with feelings. And if you come from a science background, your first reaction is probably: what does that even mean?
Because it’s so hard to get good data on private equity, people start taking shortcuts. And those shortcuts lead to some big mistakes.
Remember the dot-com bubble? Companies with zero profit, sometimes zero revenue, trading at insane valuations. Analysts invented new ways to justify the prices. “Forget earnings, count the eyeballs!” And for a while, it worked.
I already talked about why private companies are so secretive. But there’s a whole industry built on trying to find their secrets anyway.
For decades, traditional finance people had a simple answer to the noise trader problem. Milton Friedman said it. Eugene Fama said it. Fischer Black said it. The answer was: irrational traders will lose their money to smart traders and disappear.
One of the biggest problems with private companies is that they don’t have to tell you anything. In the stock market, companies have to share their financial reports all the time. But in the private world, there’s no law saying they have to.
Economics has a rule that sounds so obvious it barely needs saying. If two things are identical, they should have the same price. If they don’t, someone will buy the cheap one and sell the expensive one until prices meet in the middle. Easy. Done. Move on.
Before behavioral finance became a real academic field, people already knew something was off with markets. Traders in the 1920s had their own rules. Value investors in the 1930s had theirs. And nobody was waiting for professors to tell them the market was irrational. They lived it every day.
The words “private equity” get thrown around a lot. But people use them in different ways, and it gets really confusing.
Cyril Demaria started this book because he couldn’t find anything good to read about private equity. Most of what was out there just didn’t make sense. It didn’t match what actually happens in the real world.
Chapter 2 of Burton and Shah’s book is about the math behind stock prices. Don’t run away yet. I promise to keep it simple. The chapter introduces something called CAPM and the “market model.” These are the tools that traditional finance uses to describe how stock prices should behave. And if you want to understand why behavioral finance matters, you need to know what it’s arguing against.
I’ve been reading a lot of books on finance lately. Most of them are either too simple or way too complicated for anyone who doesn’t have a PhD in math. But I found one that actually makes sense. It’s called “Introduction to Private Equity, Debt and Real Assets” by Cyril Demaria.
Chapter 1 of Burton and Shah’s book gets right to the big idea. The Efficient Market Hypothesis. EMH for short. This is the theory that traditional finance is built on, and it is the thing behavioral finance tries to tear apart.
Let me tell you something that took me years to figure out. Traditional economics and finance are built on one really big assumption: that people are rational. And not just a little rational. Perfectly, mathematically, always-making-the-best-choice rational.
I’m starting something new here. Over the next 25 days, I’m going to retell the book Behavioral Finance: Understanding the Social, Cognitive, and Economic Debates by Edwin T. Burton and Sunit N. Shah.
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.
So I just finished walking through all nine chapters of Richard Wilson’s “The Hedge Fund Book.” And here’s what I think after going through the whole thing.
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.
So we made it through the whole book. Seventeen posts later, here’s where I stand on “Introduction to Private Equity, Debt, and Real Assets” by Cyril Demaria (3rd edition, Wiley, ISBN 978-1-119-53737-3).
After eight chapters of theory, Demaria drops a real case study on us. Not a made-up example. An actual deal. Advent International investing in Kroton Educacional SA, a Brazilian education company. This is where all the concepts from the book come alive.
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.
This is the final chapter. Demaria wraps up the whole book by looking forward. Where is private equity going? What are the big risks ahead? And could the industry actually destroy itself by being too successful? Let’s go through it.
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.
Every industry has a chapter it would rather skip. For private equity, this is that chapter. Demaria titles it “Private Equity and Ethics: A Culture Clash,” and he does not hold back. Fraud, job destruction, fake philanthropy, and the long fight for transparency. Let’s go through it.
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.
Private equity used to be the quiet kid in the back of the finance classroom. Small groups of rich people pooling money together to buy companies, fix them up, sell them. Nobody outside the industry really cared. That changed. PE firms got huge, went public, and started buying companies the size of small countries. Chapter 6 of Demaria’s book asks the obvious question: is private equity going mainstream? And if so, what does that mean for everyone involved?
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?
You want to buy a company. Or at least a piece of one. How does that actually work? Chapter 5 of Demaria’s book lays it out in 7 steps. The whole thing takes 3 to 18 months depending on the deal. And really, the entire process boils down to one word: trust. Buyer and seller have to trust each other enough to make a deal happen. Let’s walk through it.
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.
This is the final piece of Chapter 4. We covered venture capital, growth capital, LBOs and special situations before. Now Demaria walks us through the rest of the private markets universe: private debt, real assets, and a handful of other instruments that sit at the edges of the asset class.
So you have narrowed your list of hedge fund candidates. You ran the screens, looked at the charts, compared the numbers. Now what?
If venture capital is the glamorous part of private equity, LBOs are where the real money lives. According to Demaria, leveraged buyouts represent roughly 69% of all PE fund investments. This is the heavy machinery of finance, and Chapter 4 spends serious time explaining how it works.
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 of “The Hedge Fund Book” by Richard C. Wilson kicks things off with the basics. And honestly, if you’ve ever wondered what a hedge fund actually is without getting a headache from finance jargon, this chapter does a solid job explaining it.
Chapter 4 is where Demaria gets into the actual strategies private equity funds use to make money. He starts with the one everyone has heard of: venture capital. The stuff that turns garage projects into billion-dollar companies. Or, more often, burns through cash and produces nothing.
The introduction of The Hedge Fund Book starts with a pretty bold question. What if you could sit down with 30 hedge fund veterans and just ask them everything? What if someone spent over $80,000 hiring professionals with 7 to 30 years of experience to share their best advice?
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?
So you want to know if a private equity fund is actually good? Turns out, that’s way harder than it sounds. There is no stock ticker refreshing every second. No public quarterly earnings call. You are stuck with imperfect tools and incomplete data. Welcome to Section 3.3 through 3.5 of Demaria’s book.
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.
The preface of “The Hedge Fund Book” starts with Richard Wilson explaining why he wrote this thing in the first place. And honestly, his reason is pretty relatable. He read most hedge fund books out there over seven years and couldn’t find one that gave you straight, unfiltered advice from actual hedge fund managers.
So you have a bunch of big investors who want to put money into private equity but don’t want to pick companies themselves. What do they do? They hand their money to a fund manager and say “go make us rich.” Sounds simple. But the details of how that relationship works, how the fund manager gets paid, and what stops them from just enriching themselves at your expense? That is where it gets interesting.
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.
I just finished reading “The Hedge Fund Book: A Training Manual for Professionals and Capital-Raising Executives” by Richard C. Wilson. And I wanted to share what I learned from it in a way that actually makes sense to normal people.
Here’s something most people don’t realize. If you have a pension, pay insurance premiums, or even have a retirement savings account, there’s a good chance some of your money is sitting in private equity right now. You didn’t choose it. Nobody asked you. But that’s how the system works.
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?
In part 1 we talked about how the US basically invented private equity. Now the question is: can everyone else just copy the homework? Demaria’s answer is basically “it’s complicated.” Europe tried to adapt the American model. Emerging markets are still figuring things out. And the results are… mixed.
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.
Chapter 2 of Demaria’s book opens with a fun question: is modern private equity a French invention? The word “entrepreneur” is French. The guy who basically created modern venture capital, Georges Doriot, was French. But he did it in America. At Harvard, not in Paris. That tells you something about where the conditions were right.
Chapter 1 of Cyril Demaria’s book opens with a story you probably did not expect in a finance textbook. Christopher Columbus. Yep, the guy with the ships.
You would think that a thing called “private equity” would be easy to define. It has two words. One means private. The other means equity. Should be simple, right?
I just finished reading “Introduction to Private Equity, Debt, and Real Assets” by Cyril Demaria (3rd edition, Wiley, ISBN 978-1-119-53737-3) and I wanted to share what I learned.