Hedge Funds For Dummies [Kindle Edition]

I hate to admit but this book is actually pretty good. Being a financial professional as well as marginally positively biased towards the hedge fund industry, the publication of this book initially caused laughter as well as sadness in the industry. The title alone is cause for laughter: Hedge Funds for Dummies. Hilarious. It is also sad: The industry becoming mainstream so fast is somewhat sad in a sense that it loses some of its exclusivity.

The target audience is not, as the title rhetorically suggests, idiots but reasonably educated and curious people (essentially people who buy books for the purpose of acquiring knowledge and insight rather than public display). The reason for this book getting five stars is the following: Most books on hedge funds are written either by academics or practitioners. The books written by academics are quite often perceived as hoax by the investment profession because the content is abstract and dogmatic, i.e., a desperate attempt to fit the hedge fund phenomena into the corset of old paradigms such as "relative return investing" and EMH and CAPM whereas it too often transpires that the authors never have come even close to visiting or experiencing the dynamics of a trading floor in the real world. Books by practitioners on the hand often lack rigor and occasionally lack a sense for understanding the other side, i.e., the investors and their needs, requirements and constraints. Hedge Fund for Dummies finds an attractive balance. A balance between explaining or highlighting the theory including where the theory breaks down or is a poor description of investment reality on one hand and having the investor in mind on the other.

In addition, we all would seriously be better off if this book were required reading for US Congress.

As its tagline suggests, the FOR DUMMIES series is "a reference for the rest of us". Each introductory book has been designed to teach dilettantes as much as possible, in the shortest amount of time. A word of caution though, the FOR DUMMIES series is only `for dummies' in a relative sense. While the author, Ann Logue, laments the simplicity of the series, she also explains that Hedge Funds FOR DUMMIES is intended for an inquisitive, yet intelligent audience. The significance of this became increasingly apparent as I progressed further through this book.

Logue appears aptly qualified to author this text with more than 12 years experience as an investment analyst. Her qualifications include the Chartered Financial Analyst (CFA) certification and an MBA from the University of Chicago. In terms of her approach, she refreshingly engages the audience with a combination of colloquial wit and academic rigour. The only significant fault I could find is that she excessively repeats the basics, though this may be fitting for readers without a diverse investment background. Overall however, I believe Logue's unique style and objective opinions would make this book a worthwhile addition to any investor's collection.

The book begins with an ever-present question: what is a hedge fund? While the answer may be obvious to some, a lot of detail regarding the genesis and advancement of hedge funds is presented. One of the more interesting stories is that of a hedge fund operated by two of the US's most acclaimed and eminent finance professors; Robert Merton and Myron Scholes. Their fund profited from arbitrage trades in the bond market and ultimately collapsed due to a default on Russian treasury bonds. Was this collapse testament to the `random walk' of equity markets, or just the impropriety of the Russian Government? This is a question raised by only one of the many chronicles that Logue uses in her definition of hedge funds.

Prima facie, Logue's definition is more than adequate, but the early and repeated use of the term `investment partnership' piqued my curiosity. Worldly readers may know that while a partnership is a legitimate Australian business structure, it is more common as an American managed fund structure. The somewhat unfortunate implication of this is that the book is actually intended for an American readership. For Australian readers, this becomes increasingly obvious with US-specific discussions regarding taxation, superannuation, regulation and legal structure. Although this is confined to very few chapters, I did find myself skimming entire pages. However, all is not lost; this book still repeatedly surprises.

The major source of surprise is the depth of detail; this aspiring tome relinquishes its `introductory text' classification and rigorously investigates a range of investment topics (albeit in the context of hedge funds). The latter sections may begin with trivialities, such as the definition of alpha, but they promptly turn to challenge the reader by uniting academic theory, popular belief and the author's personal views. It was in these latter parts that I began to put the `for dummies' moniker into true context. Logue strives to `keep it simple', but at times she had me reaching for my university texts to revise Modern Portfolio Theory (MPT) and the Capital Asset Pricing Model (CAPM). I suggest that readers without a finance background at least engage a primer on managed funds (or mutual funds, as per the American lexicon).

As I became more comfortable with Logue's unique style and progressed further through the book, I found myself forgetting its American context and really enjoying the flow of information. After the formalities of defining a hedge fund, Logue presents a range of topics that get `under the hood' of these mysterious investment vehicles. One of Logue's more practical arguments discusses hedge funds as a unique asset class. She asks if we should place hedge funds in the same context as equities, fixed-income and property. In her true style, she presents the options, explains her opinion and then qualifies these with a discussion of Markowitz's portfolio theory. After this, the topics get quite technical for the layperson; ranging from the 11 possible ways to arbitrage equity markets, through to considering how hedge funds profit from the corporate lifecycle. Logue's constant quest to investigate all options while referring to academic theory kept me interested, even amongst unwanted references to US-specific details.

To answer whether this book achieves its purpose really depends on the locale of the reader. For the typical Australian investor, this book does not adequately educate on investment into local hedge funds. The funds in Australia are based on a different legal structure and must comply with dissimilar tax legislation and financial regulation. Despite this obvious downfall, the use of US-specific information is not nearly as ubiquitous as Logue's insightful annotations. While it does take some effort to decide what to dismiss and accept, my memories of this book are still described more by superlatives than shortcomings.

In summary, I sincerely enjoyed Hedge Funds FOR DUMMIES, especially its depth of content, the author's style, and her meticulous approach to forming arguments. Essentially, it is based on this experience that I recommend this book to budding investors worldwide.

This book covers all the bases that an investor should consider before deciding to invest. They are too numerous to mention here, but in this 342-page primer, the author clearly explains the critical information necessary to make an informed decision as to whether a hedge fund is for you.

Hedge funds have been in the news lately, but not necessarily for their supposed out performance characteristics. Nine hedge funds (for example, Amaranth Advisors) have closed their doors in the past year, some because of outsized bets by traders on the wrong side of the markets they were trading. This is not the way to increase performance. In 1998, Long-Term Capital Management blew up, even with two Noble-prize winning economists on the staff. All hedge funds are not alike and there risks that need to be taken into account.

Hedge fund assets are estimated to be $1.2 trillion with over 9000 funds in existence. For most investors, due to the stringent entry requirements, hedge funds are not an option. Wealthy individuals who may be interested in hedge funds are urged to read this book (as well as others interested in learning about the subject) before placing their hard-earned money at risk. This suggestion may save them millions of dollars in potential losses, if they decide not to invest in certain hedge funds because of their due diligence learned from this book.

Additionally, the author provides insight on setting up your own hedge fund portfolio by selecting different categories of investments. Surprisingly though, she spends a miniscule amount of time discussing exchange traded funds (ETFs) to build the hedge fund portfolio. Now that there over 425 ETFs offering all types of investment alternatives, this is one area that deserves more attention.

Overall, the author provides a credible and detailed look at the hedge fund industry. An investor needs to know the basics before committing any money to these funds. This book provides useful information to help in making the decision to invest in hedge funds.