Timing Is Everything For Best Hedge Funds Results

Like many other things in life, success in hedge funds depends a lot on perfect timing. So suggests David Smith, head of funds of hedge funds at GAM.

Like many other things in life, success in hedge funds depends a lot on perfect timing. So suggests David Smith, head of funds of hedge funds at GAM. Speaking at a recent conference, Smith says he is a strong advocate of investing early on in new managers – but not necessarily stick with them forever. There are exceptions, however, and in the case of GAM, the firm’s top 15 funds include those that it began investing in firms such as D.E. Shaw, Moore Capital Management, Tudor Investment and Eureka in their first year of existence, and continue to do so. Smith points out that there is evidence – notably a working paper released earlier this year by the National Bureau of Economic Research -- to support the theory that top performers in their first three years are likely to perform as well over the next three. In general, he says that is why GAM largely avoids investing in the 100 largest hedge funds (except for the exceptions noted above). Smith also believes that in hedge funds, only the strong should survive, and the weak ones should fold their cards early – except, he says, a few years back when those weaklings lingered on because of heavy inflows of money. Finally, Smith says double-digit annual returns are unrealistic, noting that comparing any decade with the 1990s – hedge funds hey day, it seems – is “most inappropriate” because of the tremendous flows of cash. A better comparison would be the more modes 1970s and 1980s.