Top Hedge Fund Investors: Stories, Strategies, and Advice – A Book Review

Cathleen M. Rittereiser is a co-author with Lawrence E. Kochard, Chief Investment Officer of Georgetown University, of Top Hedge Fund Investors: Stories, Strategies, and Advice (Wiley, 2010).  She’s the Director of Investor Relations with Concordia Advisors LLC, a $1 billion institutional hedge fund manager specializing in differentiated relative value strategies, with offices in New York and London. Rittereiser and Kochard also co-wrote Foundation and Endowment Investing (Wiley, 2008).

Cathleen has over twenty years experience in sales, marketing and relationship management roles with leading asset management, research and brokerage firms. Her previous hedge fund marketing experience includes positions with Symphony Asset Management and Alternative Asset Managers. She began her career with Merrill Lynch.  Rittereiser received a BA from Franklin and Marshall College in Lancaster, Pennsylvania, and an MBA from New York University’s Stern School of Business.

Cathleen and I met via Twitter. Two girls with a sharp sense of humor were bound to find each other.  We have a favorite Chinese restaurant now, one we visit any time I’m in New York City. It’s cheap, it’s casual, and it’s near her place. Last month we put a group together after the FEI Conference that included Steve Burkholder of BNA – we were toasting the memory of our mutual friend Susan Webster – Matt Kelly of Compliance Week, Stacy-Marie Ishmael of the Financial Times and my favorite tax professional, CPA, anarchist who used to be a Peace Corp volunteer.

Good thing I only hang with people who like spicy food!

Cathleen asked me to review her new book and I agreed. Given my lack of objectivity about Cathleen’s fabulousness and minimal knowledge of the hedge fund industry, I asked my good friend, David Fialkowski, to help me.

Dave is Vice President at FISCO Investment Management in Atlanta. Prior to FISCO, he was the Director of Marketing and Client Service for six years for Havell Capital Management and a Senior Vice President  of CRA RogersCasey (formerly SEI) where he led the firm’s Capital Markets Group and their Due Diligence effort. He started his career as the Managing Director for the Center for Research in Security Prices at the University of Chicago Booth School of Business. He has a BA from the University of Chicago in Economics and Philosophy and played football for the Maroons.

Here’s Dave’s review of the book.

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Cathleen M. Rittereiser and Lawrence E. Kochard have just published, Top Hedge Fund Investors: Stories, Strategies, and Advice. This is a useful book for anyone who has either made or is contemplating an investment in hedge funds. The authors provide a few short chapters on what a hedge fund actually is, a process for evaluating hedge funds and short contemplation on how the industry has been affected by both the financial crisis and Madoff scandal.

The bulk of the book is devoted to the stories of successful fund of hedge fund investors. The book not only chronicles their histories and successes, but offers important insights into their investment processes and their outlook for the industry. Top Hedge Fund Investors also serves as a much needed ‘gut-check’ for the entire industry in our post- credit crisis world.

Current and potential hedge fund investors are well served by the candid and expansive interviews of successful hedge fund investors conducted by Rittereiser and Kochard. These managers run funds of funds, hedge funds that invest in other hedge funds. Far from the swashbuckling tales of mega-trades made by hedge fund managers, this book points out that, success = work. And for the nine managers profiled here, lots of work = lots of success.

Not willing to match their effort? Think hard about investing in a hedge fund.

The need for the work is underscored as the authors and their subjects illustrate the complex strategies and logistics needed to successfully extract the returns and manage the risk in a hedge fund. That risk is hardly limited to market risk. The example of Ken Griffin’s earliest days running his Citadel fund are a perfect example of the non-quantifiable risks that come into play as you move beyond buy and hold.

Equally useful is the explanation of what a hedge fund is not. Although leverage is an important part of many hedge strategies, a simple levered portfolio does NOT a hedge fund make.  No need to pay up for what you can do yourself.

The use of leverage brings us to the ‘gut check’ part of the story. The authors wrapped up this book just post- credit crisis which gave each of the managers a chance to reflect on the future of the industry. Reading this book will help you decide if the prospects of hedge funds merit the risk. It isn’t just the scarcity of financial leverage since the credit crisis that dampens prospects for hedge funds. Increased regulation and weakened balance sheets have also lowered prime brokers’ capacity for the ‘economic leverage’ created by shorting and many derivative transactions.

I have one major problem with the book. In the introductory chapter devoted to the investment process, the authors adhere to the party line that, “…manager selection is the most crucial element of the entire hedge fund investment process.” I would suggest, as several of the interviewed managers do, that strategy selection or allocation is the most important element. Every strategy has its headwinds and tailwinds. And, as mentioned earlier, adverse market direction is hardly the sole headwind. Having a meta-perspective into what areas of the market are crowded, which relationships are breaking down and, especially now, what regulation may arise to scupper profitable arbitrage is absolutely necessary.

Do you have what it takes to be successful?

Read the book and compare your capabilities and level of commitment to those who have succeeded.