The last few months the investing community has experienced some fairly dramatic hedge fund "blow-ups". These debacles are nothing new, as they tend to happen from time to time. It can be very difficult for hedge fund investors to avoid all of them, as evidenced by the demise of funds such as Sowood, a Harvard-bred fund that was able to raise substantial capital from major institutions including Harvard's own endowment. Sowood's stellar background and enviable client list did not help it avoid losing more than half of its capital in a matter of days. Similar stories have surrounded funds at Bear Stearns, Basis Capital and more recently a plethora of large, well respected quantitative funds.
At Innovest, the recent turmoil in the hedge fund arena has further validated our approach to hedge fund investing: choosing to invest directly in hedge fund of funds rather than single or multi-strategy hedge funds. While we have not been immune to losses stemming from many of the recent crises, our client's losses have been substantially muted in comparison to investors who had direct positions in affected hedge funds. For more on our approach see this white paper that Innovest recently produced regarding the subject of hedge fund investing.