Ted Seides is best known for the 10-year (2008-2017), $1 million bet he made on behalf of Protégé Partners with Warren Buffett. Buffett put his money in Vanguard’s Admiral shares; Protégé, in five hedge funds of funds. As of February 2015, seven years into the wager, Vanguard’s S&P 500 index fund was up 63.5%; the hedge funds, an estimated 19.6%.
In an unconnected move, Seides left Protégé, where he was president and co-CIO for 14 years, following five years in the Yale University Investments Office. His self-described “free agency” status presumably gave him ample time to write. The result: So You Want to Start a Hedge Fund: Lessons for Managers and Allocators (Wiley, 2016).
The book, though small in format and only about 200 pages in length, is packed with information, including case studies. Seides knows whereof he speaks. In his role at Protégé he was involved in both sides of the hedge fund world, manager and allocator, because the firm “invests in small and specialized hedge funds on an arm’s-length and seed basis.” The author “worked actively with each of Protégé’s 40 seed managers.”
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This book is not a step-by-step manual; it is rather, as the subtitle says, a series of lessons. Seides warns, for instance, against a co-portfolio manager construct, calling it a recipe for failure. “Better-structured investment organizations have slightly unequal investment leaders, where one portfolio manager drives the car, and the other second-guesses his directions.” (p. 77)
He explores the tug of war between flexibility and style drift. “Changing a strategy to evolve with the times,” he notes, “is a riskier proposition for the manager’s business. If his opportunism proves successful straight away, he may earn the right to be flexible for the long term. But if the shift fails to perform in the short term, the manager may lose some clients even if he is ultimately right on the stance.” (p. 108)
Illustrative of Murphy’s Law, Seides claims, “the best performance month in a manager’s career inevitably comes the month before his launch. There’s no reason why this happens, but it seems to occur with alarming frequency.” (p. 150)
For every hedge fund that folds there are probably half a dozen young Turks who think they can succeed. Reading Seides’s book may well be one of the best early investments they can make.