Buying


Evaluation of a potential investment in a hedge fund

by scott pickard

I would ask to see a 1-paragraph synopsis on ALL of their equity positions, not just five. If the stocks they are selecting intuitively make sense to you, then that’s a good sign. Of the five equity positions they profiled, I liked their explanations and logic behind their positions. It was easy to understand and made sense to me.

Arbitrage trading is simply mathematical gaming and making money for money’s sake. It has nothing to do with investing in the value of a company’s technology and products. If they’re only doing a small percentage of trades using an arbitrage strategy, it may not be a big issue.

Can they show a graph of the growth of the total $size of fund?

Have they been successful in building their base of investors? What is the current number of investors? Have any investors dropped out? Why?

I would ask for a few callable references so that you could get a current investor perspective on SC’s performance and the investors’ perspective on the quality of reporting and customer service. I would also ask to see a sample quarterly report.

The 2% management fee + 20% performance fee is standard. You need to make sure that the performance fee only applies to the net profits, i.e., profits after losses in previous years have been recovered.

It is also reasonable to require that the performance fees include a “hurdle,” so that a fee is only paid on the fund’s performance in excess of a benchmark rate or a fixed percentage. That is to say, the manager is only rewarded if the fund generates returns in excess of the returns you would’ve received if you had invested your money elsewhere.

What protections does SC provide in the event of fraud or breach of any of the provisions of the Subscription Agreement? I see none. There should be a reciprocal indemnification by SC to the one you would be expected to sign to in section D of the Subscription Agreement.

The Memorandum indicates that you can liquidate and withdraw your account with a 90-day notice, but the Subscription Agreement does not mention this.

In section E, “Power of Attorney,” the LLC should be required to notify investor of any substantive changes made to the LLC on investor’s behalf.

IN SUMMARY:

  • I would not make any kind of decision on this investment until you receive good answers to these due diligence questions and issues.
  • The documentation is very sloppy, and that is concerning. I wouldn’t sign the Subscription Agreement until some of these errors are corrected.
  • If there is one SC, there are hundreds if not thousands to choose from. By comparison to the pool of equivalent investment funds you could choose from, they are very inexperienced. And with inexperience comes higher risk.
Personal Time Investing Buy the rumor, sell the news. But, are you listening to the music or the noise? in general: alternative investments: secondmarket | consumer investing behavior: dcisions | earnings whispers: www.whispernumber.com | books: The Only Three Questions That Count Fisher | gamify: kapitall | idea investing: motifinvesting | impact investing: Global Impact Investing Network GIIN | IPOs: www.hoovers.com/global/ipoc/index.xhtml, http://biz.yahoo.com/reports/ipo.html | Morningstar: www.morningstar.com | Motley Fool: www.fool.com | MSN Investor: http://moneycentral.msn.com | regulation: FINRA | short selling: dangerous | Silicon Investor: www.siliconinvestor.com | startups: DataFox | The Street: www.thestreet.com brokers: E*Trade: https://us.etrade.com | Fidelity: https://www.fidelity.com | kapitall | Schwab: https://www.schwab.com | TD Ameritrade: www.tdameritrade.com | thinkorswim

Historically only 18% of fund managers beat the S&P500 index on a consistent basis.

sp

Customers should easily understand pricing in one read

I know I’m not telling you anything you don’t know, and Product A is a work-in-progress in terms of sales and pricing, but you could never scale Product A to hundreds or thousands of customers if you have to do as much hand-holding as has been required for recent customers. This seems to indicate that the pricing scheme is not simple enough. – sp

Marketing Pricing The right price for parking is the lowest price you can charge and always have one or two spaces left to park. How is pricing strategy developed in the company?  What are the factors that affect pricing strategy? (a) cost-of-goods sold; (b) overhead; (c) competitors’ pricing; (d) past pricing trend; (e) customer sensitivity to price; (f) volume; (g) “market-will-bear” pricing  What has been the price trend for the past five years?  What is the price trend for the next five years?  Will price competition increase in the next five years?  Is there a price leader in the industry? If it’s not the company, why?  Do salespeople (and others) have the approval to sell products at a price that differs from the approved price list?  Are prices reviewed/adjusted each year?  Can cost increases generally be passed on to the customer?  Are we routinely using online comparative shopping systems to monitor and adjust our pricing relative to the competition?  Do we have a good understanding of how our customers react to price changes or discounting policies?  Have we correctly segmented our customers when it comes to pricing and discounting?  Do we provide our sales channels clear discounting guidelines and targets?  Do our sales people offer discounts outside of margin guidelines?  Can we quickly adapt to market changes to achieve short-term objectives without sacrificing margin or damaging long-term growth?  Do we have real-time visibility into profit performance by channel, product, and customer segment?  Are we able to quickly sense and respond to emerging opportunities and competitive threats as they arise?  Is our pricing and promotion strategy driven only by costs and competition, or more by our customers? in general: pros | www.vendavo.com | www.zilliant.com | price fixing | real-time pricing intelligence: blacklocus | revenue management: modeln categorical thinking: Does bundling products together undermine their value? lease pricing: What percentage of sales are leases?  What is the length of a typical lease?  What percentage are full payout leases?  Does the company have any third-party leasing agreements at present?  Are the company’s license agreements effective revenue generators? software: Can we demonstrate an immediate return on investment (ROI) for our software customers?  Can we track the success of our technology implementation?  Do we map the cost of our software to our customers' business needs in measurable ways?  Do we help customers justify software purchases internally?  Are our software contracts easier to understand than the competition's?  Do we offer more manageable terms that do not lock-in customers to outdated products?  Is our warranty and performance guarantee credible?  | digital licensing: www.protexis.com | recommend new software at install time: opencandy books and articles: Competitive Pricing: Harnessing the Power of the Waterfall Model Accenture | Customers Will Pay More for Less Chernev | Priceless: The Myth of Fair Value Poundstone | The Strategy and Tactics of Pricing Nagle Art | Customer | Supply Chain | Inflation | Buying

Keep it simple, stupid (KISS).