Knowing the difference between absolute and relative returns is fundamental to understanding how the hedge fund industry developed and the key benefit to investing in a hedge fund. In the following video, I explain the difference between absolute and relative returns and why this distinction is important.
Video Transcript/Summary: The strategies and tips provided within this video module include:
Before hedge funds, investors often suffered heavy losses by being only long on stocks during a market downswing.
Hedge funds allowed investors to insulate themselves to some degree from market shifts by hedging their long bets with shorts.
Hedge funds seek absolute returns instead of relative returns.
Absolute returns means that the hedge fund aims for an absolute return of x% every year irrespective of what happens in the stock market.
Relative return managers peg their performance to other fund managers or indices instead of an absolute return.
When you hear people talk about absolute return understand that they are shooting for a return no matter what their competitors or the stock market is doing.
Transcript of Difference Between Absolute and Relative Returns
Hello, this is Richard Wilson and today I’m going to explain to you the difference between Absolute Returns and Relative Returns. It’s a pretty fundamental concept to understanding how hedge funds work and how they came about. So I think it’s really important to understand this if you’re taking the CHP designation or just working on the hedge fund industry in general.
So to start with, the hedge fund industry started because people figured out that when the stock market goes down, they don’t want to be losing money by being long on stocks, by buying stock. They want to be able to short stocks, and use both long stocks and shorting stocks within the same portfolio. It’s kind of hedging your risk with shorting some stocks, and the portfolio is kind of where the term hedge fund came about from.
So having an absolute returns versus relative returns is really at the core of what the whole hedge fund industry is all about. Absolute returns means that for your investors and your hedge fund, if you’re an absolute return hedge fund, you’re trying to return let’s say 7% or more every single year. It doesn’t matter what the economy does, what the stock market does, you are trying to get that 7% return and you’re trying to do that by shorting stocks you think are weak or are going to go down in value or down in price. You can go in long on stocks that you believe, or buying stocks that you believe are going to do relatively well compared to the greater marketplace.
This way if a market goes down, you make money on your shorts. If the market goes up, you make money on the long that you’ve made, and you’re trying to get that 7% return no matter what happens in the marketplace. Relative return managers are really trying to beat the market. They might pin themselves against the S&P 500 and more likely against other hedge fund managers that run their type of strategy like long or short equity or global macro. But with a relative strategy, if the market goes down 20% and you only go down 10% then that’s the reason to celebrate because you’re trying to beat the market and you just lost half as much.
If the market, it goes up to 7% and you go up 15%, again, that’s another reason to celebrate if you’re a relative return manager in most cases, then that’s what you’re trying to do. Some of the issues they have come up lately have been whether there are that many absolute return managers out there. During the two recent financial crises, when the economy went down, the stock market went down drastically. The truth is even “absolute return managers” lost some money. Almost all of them did. Some of them are very proud to have only lost 4%, the market might have went down 15% or 25%. But the truth is how absolute return are these mangers if almost nobody had an absolute steady return.
So it’s really a degree. You can think about it as a relative sliding scale of how much they’re focused on relative returns versus absolute returns in the hedge fund. But for the certified hedge fund professional designation, if you’re working on the hedge fund industry, when you hear people talking about absolute returns, you have to know they’re shooting for a return no matter what the stock market is doing, where relative returns are based on how someone was doing relatively compared to the broader stock market.
So thank you for joining me for this video. I hope this helps explain absolute versus relative returns and I’ll speak with you again soon.
I hope that after watching this video you have a better understanding of the difference between absolute and relative returns and why it an important concept for hedge funds.
I worked for years as a third party marketer for hedge funds and in the following video I am going to explain what third party marketing is and the role of third party marketers.
Video Transcript/Summary: The strategies and tips provided within this video module include:
The definition of third party marketing is the hands-on capital raising and marketing of investment funds by independent consultants that work outside of the fund.
Third party marketers typically receive 20% of the fees that are billed on the assets raised although this number and structure varies by fund and contract.
There are low barriers to entry for third party marketers and it can be very lucrative.
Third party marketing firms typically take on 3-5 clients at one time.
Some third party marketing firms work on a retainer as well as a percentage of the fees on the assets raised.
The other model is to not charge a retainer but the third party marketing firm will take on many more clients, often across a broad spectrum of strategies.
A growing trend in third party marketing is to have the firm focus on a single distribution channel such as endowment funds, pension funds, etc.
Be very detailed in your contract negotiating to avoid later disputes.
I hope that this video has provided you with a completed definition of third party marketing as well as some tips for evaluating third party marketers.
Whether you are a wealth management firm converting to a family office or you are starting a multi family office or you are a current multi family office looking to grow your assets, this video will be very helpful to you. In the following video, I provide you with six tips on growing your multi family office wealth management business.
Video Transcript/Summary: The strategies and tips provided within this video module include:
When you look at your breakdown of services versus your competitors, make sure that you have holistic services that fill the niches that your clients are expecting. Look at your top competitors in your region and the top family offices in the nation and make sure that your offering is competitive if not better.
Make sure that your marketing materials are class A and institutional quality.
Be sure to build in references, word of mouth marketing and credible authorities associated with your family office.
Focus on one or two unique features that your multi family office wealth management business can offer that will make a difference in the eyes of your clients.
Make sure that you have systems in place for your marketing and operations in your family office.
Develop your client avatar.
I hope that by following these tips you will grow your multi family office wealth management business.
If you are a fund manager you may be asking, “What does a conference call have to do with due diligence?” In the following video recorded in Madrid, Spain, I explain how the conference call is an integral part of the due diligence process and how you should best prepare for a due diligence call.
Video Transcript/Summary: The strategies and tips provided within this video module include:
What does a conference call have to do with the due diligence process?
For more institutional investors you will have to go through a multi-step due diligence process.
A conference call is often a part of this due diligence process, sometimes the very first step in the process.
During the due diligence call you will cover your team bios, a powerpoint presentation or pitch book and then the investors will ask you questions and get to know your fund better.
It’s very critical that you understand that conference calls are a big part of the fund due diligence process.
I hope that this video helps prepare your fund for a due diligence conference call and helps you understand how the conference call fits into the broader due diligence process.
As more and more investment funds expand their reach to all corners of the globe, learning how to raise capital internationally is a unique skill that will benefit any fund. In the following video recorded in Madrid, Spain, I speak about the three synergies in international capital raising and how international capital raising differs from traditional capital raising in a single country.
Video Transcript/Summary: The strategies and tips provided within this video module include:
International capital raising has become more and more important in recent years.
There are hundreds of countries where people are rich enough to invest in hedge funds but there are only a few dozen countries where people actually know about alternative investment funds and invest in them.
Geography is important in international capital raising. If you are going to raise capital internationally you should try to target near-by nations rather than all over the globe.
The regulatory environment for a European country could be drastically different than the regulation in an Asian country.
Language is another important aspect of international capital raising. It is more difficult for you to raise capital in a country where investors do not speak English or in a country that you do not speak the language.
The lessons in this video should help you focus your efforts and energy on where you can raise the most capital in the least amount of time. By using these three synergies you should be able raise capital internationally with greater success and grow your fund.
In the following video, I explain to you what a due diligence questionnaire (DDQ) is and why all hedge fund professionals should be very familiar with it. I also provide you with some tips for responding to a hedge fund due diligence questionnaire.
Video Transcript/Summary: The strategies and tips provided within this video module include:
A hedge fund due diligence questionnaire is a 20-60 page document that includes 30+ questions on how your hedge fund manages risk, how your hedge fund operates, and any other questions that are important for hedge fund investors to know.
The hedge fund due diligence questionnaire is used by hedge fund investors to evaluate hedge funds and compare that hedge fund to others.
Often times, hedge fund investors will take your answers to the due diligence questionnaire and keep it in a database for years. This is why it is so important that you prepare for this DDQ and provide the answers that investors want to hear.
Make sure that your response is provided within one day.
Make sure that your response is reviewed by a compliance or legal counsel.
Keep a master DDQ on file based on all of the hedge fund due diligence questionnaires that you have completed.
A hedge fund manager recently emailed me and said that he did not know what a DDQ was. I hope that this video has provided you with a better understanding of what a hedge fund due diligence questionnaire is and some valuable tips on how to complete a hedge fund DDQ.
Transcript of Hedge Fund Due Diligence Questionnaire
Hello, this is Richard Wilson. I wanted to create a short video module to help explain to you what a Due Diligence Questionnaire is or a DDQ is. I’m here in downtown Singapore, in town for an investment conference both here and in Tokyo. And I just got an e-mail this morning from someone who runs a hedge fund and didn’t know what DDQ standed for. And DDQ stands for Due Diligence Questionnaire.
So I just wanted to make this short, 3 or 4-minute video because I wanted people that can’t come to hedgeblogger.com or that a completely certified hedge fund professional designation program to know what a DDQ is. It should be a term that you know and are familiar with. You’re not lost during a job interview or when meeting with a potential investor. So a Due Diligence Questionnaire is a 20 to 60-page document which includes generally 30 to 50 questions or more about your hedge fund and how you operate, how you manage risks, how you make investments, how you manage your team and et cetera, et cetera.
So basically it’s a very well-detailed questionnaire about everything related to your hedge fund business so that a potential investor, typically an institutional investor can evaluate your hedge fund, how sophisticated you are, how institutional you are, how risk aware you are, what tools you use. They’ll ask things about disaster recovery, about progression within your team, about what happens if your portfolio manager leaves, how would that affect your trading performance, about the scope of your investments and how that could change the different types of market conditions.
And it’s just really important to do a very good job replying within the Due Diligence Questionnaire when an investor gives you one because often times they look at that, enter it in to their data base and stays there forever in their database, within that institutional investor’s firm. And often times if you answer just one or two questions wrong, it would kind of knocked you out of the running or you might spend a whole hour of phone call or two making up for a few small mistakes.
So a few tips, if you’re complete in DDQs and already knew what one was or you’re about to complete your first DDQ, make sure that your responses are provided within one day. One business day is a standard for replying to a DDQ, otherwise you’d like you’ve never done it before. Another test is to make sure it’s compliance approved. You know this isn’t like marketing materials per se. It really is if you’re trying to convince the investor to invest in you, is you can’t just say whatever you’d like. You have to pay attention to compliance rules and marketing rules, and have your compliance attorney or legal expert look at it before sending it out. And third you should definitely have a master DDQ on a file.
Once you’ve done one of these once, keep it. If you do a second one figure out what other questions were unique in that second one because most of them probably will be similar from the first one and then create a master DDQ file. So the more of these you complete, the more professional answers you’ll have, the quicker you’ll be able to do it, the graphs and graphics you’ll have to insert. You’ll just look more professional and you’d be more efficient at completing these DDQs.
So I hope this helps if you didn’t know what a DDQ was, you do now. And thanks for joining us here today.
If you are starting a hedge fund or currently running a hedge fund then this might be one of the most valuable videos that you watch this year. In the following video, I cover process documentation, why it is important, who should be doing it and I will give an example of how it can work.
Video Transcript/Summary: The strategies and tips provided within this video module include:
Write down all of your high-level processes on a list.
Use a separate piece of paper or MS Word document to document the steps for each of the processes.
Analyze these steps and processes to see whether there are areas for improvement or unnecessary steps that should be removed to streamline your hedge fund business.
This will help you figure out whether your team and your resources are being used to their full potential.
“If you can’t document your system then you don’t know what you are doing.”
Transcript of Documenting Operational Hedge Fund Processes
Hello, this is Richard Wilson and right now we’re going to talk about process documentation, why it’s important, who should be doing it and just give a quick example of how it can work. And if you are starting a hedge fund or if you are running a hedge fund and you’re looking to improve its operations then this might be one of the most valuable videos that you watch this year.
Basically, process documentation allows you to see your business from a top-down view everything that’s it’s doing with more clarity probably than you ever have before. If you’re never done it this will provide a lot of value to your firm. The first thing you need to do is write down every important process that your firm undertakes, maybe you have an investment research process, maybe you have your general investment process, maybe you have a hiring process, how you hire more people to your team, it is an operational processes, some auditing processes, a compliance reporting process. Write down all of those major high-level processes. You should have at least 10 to 15 and probably not more than 30 and write down all those processes in a list.
Next, what you want to do is get a separate piece of paper for each process and you can use process documentation software if you’d like. You can use mind-mapping software if you’d like. But you can do these within Microsoft Word. It doesn’t take any special technology or software purchases to complete these tasks. If you open a Word document now, take those, say 20 business processes you have and document steps, 1 through 10 or 1 through 20 of what is done with each step of that process along the way.
Now, often times — I’ve done these for businesses that range from a million dollars of revenue or $500,000 of revenue to multibillion-dollar corporations and documenting these processes can be very challenging because lots of people operate in silos and sometimes even the CEO of a hedge fund or a company might not know how all the processes flow through the organization. So it’s very likely you’ll have to interview other people on your team or service providers to figure out exactly what all the steps are from soup to nuts, how things get done within your hedge fund.
What is important to do as an important process? So what you need to do is document all 20 or so of those business processes step-by-step so you can look at them and see if there’s any obvious areas of inefficiency improvement, maybe those steps, it can be taken out, maybe you’ve been meaning to improve your transparency if you’re a hedge fund or the institutional quality of it and some of these process if documented the right way can actually be shown to investors, to show them how you operate in a professional consistent manner.
It’s also important to have these in place so you can really analyze whether your team skills and abilities are actually being put to use in the best areas. I spoke with a hedge fund recently who documented all of their business processes and they ended up outsourcing 16 of the 18 business processes that they ran. They figured out that only two of them really pertain to their core competencies and their competitive advantage.
So integrate a story to show, if you’re starting a hedge fund or looking to improve your operational improvements this is something where you don’t need to go hire a consultant right now and spend $300 an hour paying them to document your processes, you should have your processes documented and this is somebody at a mid-level or a high-level within the organization can do. It does not take that much time to document them and it can give you some huge benefits that could lasts for a remainder that your firm or fund is in business.
So there’s one quote, I think it’s by Drucker that says “If you can’t document your system, you don’t know what you’re doing.” And then there’s another quote, I think it’s by Deming that says “If you can’t document what you’re doing, then you can’t improve it.” So it’s a great opportunity to both improve and make sure you know exactly what you’re doing and what you’re not doing by documenting all of your business processes and it’s something that I don’t see often done, so I think if you do this and you do it right and take away some lessons from it, it can be somewhat of a — you know one of those 10 things that gives your hedge fund a competitive advantage over others. So thank you for your time and we’ll see you again soon.
I recently spoke with a hedge fund manager who documented operational processes and ended up outsourcing 16 of the 18 processes that they ran. This shows how documenting operational hedge fund processes can help save your hedge fund money and make your fund more efficient.
I have worked in the hedge fund industry for years and I have provided career coaching to hundreds of professionals. In the following video, I provide you with the top five hedge fund career mistakes that you should avoid.
Video Transcript/Summary: The strategies and tips provided within this video module include:
Don’t be annoying.
Don’t be overconfident.
No long resumes or emails.
Generic is boring.
Passion is not enough.
Transcript of Hedge Fund Career Mistakes:
Hello, this is Richard Wilson. Top 5 big mistakes that career professionals make while trying to work in the hedge fund or private equity industries. So to start with, let’s move to the PowerPoint here. All right. So the top 5 mistakes from a high-level are basically don’t be annoying, don’t be overconfident, no long resumes or e-mails, generic is boring and passion is not enough. So we’re going to go quickly into each of these areas and then kind of summarize it at the end.
So first not being an annoyance. Many professionals that want to work in the industry are very persistent because it is very competitive to get a position especially when you’re trying to get your foot in the door in the first few years of your career. And what happens is you exponentially become more annoying to the more valuable contact you’re trying to get in touch with because the more valuable they are to work for, probably the more busy they are and the faster time goes by for them, and the more e-mails and the voicemails they get, and if you send them three e-mails in the same day asking if they got their previous two e-mails, they’re just going to delay all of your communications and not want to work with you because you obviously don’t respect their time or you just don’t live in the same reality of things being very busy and you have to be patient for them to get back to you.
We would suggest following up with somebody every 12 days, anywhere between 10 and 15 days would be fine. Just don’t make 2 or 3 phone calls in the same week or send three e-mails in the same week, that’s not going to help you but there are other things you can do to improve your chances of being hired. So the first mistake, don’t be annoying.
The second mistake, don’t be overconfident. Somebody e-mailed us last week saying that they were a brilliant salesmen, that they were a genius, that they were like a God in their industry of sales and they wanted to work in hedge fund sales. And what happens is, is it comes off as something that can hurt your chances in two ways if you’re overconfident. One, it shows that you’re maybe trying to overcome compensate for not having something, for maybe not having any relevant experience or not having some basic skills. But more importantly most people in the industry who are successful know that as soon you learn something, you find three more things you know nothing about.
For example, my background in capital raising and marketing for investment funds, I raise millions of dollars and I’ve learned a lot of things but only in the past year and a half have I realized that the writing of persuasive e-mails and writing of sales letters and writing the marketing materials and the actual words you use can be very powerful and there’s a whole niche industry around sales copywriting and being an expert at writing effectively that I didn’t even know existed 45 years ago. And just an example of once you learned something, there’s always 4 more doors to open. So saying that you’re an absolute genius or that you’re brilliant just comes off as you’re not having learned enough to know that you don’t know a lot yet because the more that you know then the more you don’t know.
So hopefully it’s not too confusing there. So the third thing is remember the mistake you should try not to make, is not to have too long of a resume or too long of an e-mail. Your resume should be one-page long at the very longest, never more than one page. You should have all of your bullet points and action items for each job that you’ve held very clearly written so that you don’t waste the time of the person reading your resume. Take off all the extracurricular activities that aren’t relevant. Take off the 8 eight bullets points in each job position. Take off the jobs that aren’t related to the job you’re trying to get and just make it very clear and very straight forward, who you are, what you do, what you can’t do and why you’re valuable to that firm.
The same with your e-mails, don’t write 6-paragraph essays because nobody will want to read them. And again, the more busy and valuable that contact is, the less they’re going to want to read a very long e-mail, so you’re naturally going to attract the employers that you’re probably least likely to want to work with. So you want to keep your e-mails very short, have one sentence on who you are, one sentence on why you’re e-mailing them, one sentence on how you could help and then a sentence or two on an example of how you’ve helped in the past in a similar situation and usually keep every e-mail very short but end with what you want them to do, like you want to meet for coffee, you want to meet at their office, you want a phone interview, have an action item at the end of the e-mail and don’t ask 20 or 30 questions. Just have one action item.
The next mistake that people make is being too generic. They show passion but there’s nothing unique about them. A good example that I heard a recent sales trainer use was if you go into a grocery store and you’ve just got a pounding headache or a migraine, you’re not going to go to the shelf and look for or pick out a big blue bottle on the top shelf that just says medicine, you don’t want medicine, you want the little box that says “fast-acting migraine relief” or “fast-acting headache medicine.” You want something really unique that solves a unique problem that provides you an exact value or something tangible, something specific. Lots of people I think don’t get hired because they look generic,. They look like the blue bottle of medicine and nobody needs that and nobody wants to pay for that.
So you have to position yourself even if you’re working for a fund that values diversity of experience or skills, that’s fine but then you have to brand yourself as having three unique skills and three unique medicines and things you bring to the table and not something that’s just generic. The last thing to watch out for is focusing too much on the fact that you’re passionate to get into the industry. Our firm alone gets over a hundred internship applications a month over a thousand a year and probably 500 out of 1,000 are very passionate about working in the industry and that’s just is so common that they’re passionate about it. It’s not that it doesn’t mean anything, it does mean a lot but that’s not enough.
If you focus too much on just the fact that you’re passionate about it and you’ll do anything to get the job, you won’t get the job. You need to have other things going for you. You need to focus on getting the employers attention whether that’s knowing somebody in common, being in a networking event and meeting them in person, having some connection with them or something that will catch their eye, catch their attention. You need to have a brand, the combination of your experience, your internships, your research. It has to combine in something unique, something that’s not too generic, blue bottle of medicine.
The next, you have to have something tangible, approve an example, something you’ve done in the past for a past client, for a past employer, something that you’ve done research on and you’ve created that could be a tool to this organization and help them make more money. And then the last thing is you have to have some sort of risk reversal offer in place. So you have to have something that’s going to take the risk off of the table for them, whether that’s working for 4 weeks without pay or working without pay till they realize you’re so value, they want to pay you to make sure you don’t leave. Those can all be tactics that you can use within your career.
Within my career, I’ve actually used a lot of these tactics, for example one time we’ll get in a third-party marketing job, I wanted to work for a certain firm so I reference a couple of people I’ve met in person that he knows that are friends of his in the industry and they had recommended I meet with him, so I referenced that. I got the first meeting, I sent in e-mails following up saying specifically how I think I could help on his team after I learn more about what he does. After that, I knew that hedge funds and investment funds in general create pitch books to market themselves and those pitch books have very exact sections to them. You know 15 or 20 things have to be in that pitch book.
So what I did was I created a pitch book for myself and I pretended like I was a hedge fund and put together this pitch book, so every page normally would tell you something about the pedigree of the team. I talked about the pedigree of myself where it talks about the education of the team or their investment process. I talked about what I had invested in myself, where we talked about performance. I talked about my performance and past jobs. So I did a couple of things that, first of all, it helped me get the job and it also showed that I was familiar with what a pitch book was, how it was structured, why it’s used. It just showed a lot of industry knowledge and I showed commitment. I had obviously spent 10 to 15 hours preparing that.
I think that went a long way in helping me to get the position. The last thing I did there was work for free for 4 weeks. And after 4 weeks they saw that I was worth keeping on and they hired me and I got the position. And this was a firm that was not advertising an open position. They were not hiring “anybody.” But I got it, and I think anybody can kind of follow this formula and this process but there are things that can hold you up. So once again, top 5 things to watch for that can hold you up: Don’t be annoying, don’t be overconfident, don’t write long e-mails, don’t have a long resume, don’t be generic, don’t be the blue bottle of medicine and passion is not enough. Don’t just be passionate when you communicate with potential employers.
Get their attention, have a brand around yourself, provide tangible proof and examples of your work and then remove the risk from hiring you. And I think if you can avoid those 5 career mistakes then you’ll be ahead of at least 75% or 80% of the people you’re competing with for positions. So that’s all for today. We’ll be coming out with many more videos very soon.
These five mistakes are some that I see made all the time by professionals trying to start their hedge fund career or simply climb the ladder at a hedge fund. It is important that you avoid these hedge fund career mistakes in your hedge fund career.
Below is a free-to-watch video module on basic financial modeling. A financial model is a tool used to forecast a business’s results and is designed to be able to evaluate multiple scenarios. Investment bankers are expected to be experts in financial modeling. This video is three of three video modules in our series: Basic Financial Modeling. Click here for part one of this series. Click here for part two.
This video was taken from our Certified Investment Banking Associate (CIBA) program which is the investment banking certification and training program hosted on our BusinessTraining.com platform.
Video Transcript Summary of Basic Financial Modeling:
The following are the final steps in the process for creating a basic financial model:
Setup debt and interest schedule including: interest rates, beginning balances, new borrowing, amortization of new or existing borrowing, and ending balances and interest amounts.
Link interest to IS. Continue IS forecast through bottom line.
Link debt balances to balance sheet.
Input line of credit borrowing repayment calculation on cash flow statement and link its activity to debt schedule.
Finally, link ending cash from cash flow statement to top of balance sheet, calculate interest earned on cash on income statement.
This is part three of our series on basic financial modeling. Click here for part one of this series. Click here for part two.
Below is a free-to-watch video module on basic financial modeling. A financial model is a tool used to forecast a business’s results and is designed to be able to evaluate multiple scenarios. Investment bankers are expected to be experts in financial modeling. This video is two of three video modules in our series: Basic Financial Modeling. You can watch part one here. Click here for part three.
This video was taken from our Certified Investment Banking Associate (CIBA) program which is the investment banking certification and training program hosted on our BusinessTraining.com platform.
Video Transcript Summary of Basic Financial Modeling:
The first step is to forecast Income Statements (IS) to the EBITDA.
Forecast key balance sheet items.
Setup cash flow statement including operating and investing activities.
Link capital improvements from cash flow to PP & E line on the balance sheet and link depreciation on the balance sheet to its line on the IS.
Perform depreciation calculation on IS.
This is part two of a series on basic financial modeling. Click here for part one of this series. Click here for part three.
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