How to build a hedge fund with zero overhead, no employees and zero debt
Corporate finance institute professor Scott W. Wollman says a firm’s bottom line must be considered when considering its investment strategy.
Wolman, a partner at the firm of McKinsey & Co., said in an interview that if the firm’s strategy includes a mix of risk-adjusted returns, dividends and earnings-generating activities, it could be deemed to be a low-cost hedge fund.
But if the fund does not include all of these, the firm would be considered a high-cost firm.
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The WSJ article Wollmann said firms should consider the costs of risk.
He said firms may be required to track and analyze the cost of investments, such as the risk of a downturn.
But that data should be shared publicly so other investors can evaluate the performance of the firm.
Wollsman said firms could also track and evaluate their returns using their own proprietary data and then use that information to compare their performance to that of competitors.
But companies should also include a balance sheet of cash and assets to document their performance.
Wollman said that when considering hedge funds, a firm should also consider the potential return on assets.
“There are a lot of ways in which hedge funds can outperform traditional assets and so we should be mindful of that,” he said.
“In a low interest rate environment, when you have a very large portfolio, you should be able to return on your capital more than your asset holdings.”
Wollsman suggested hedge funds could be a better investment because they can be a lower-cost way to manage risk.
“If you can generate revenue on your assets, it makes sense to invest in hedge funds,” he added.
Bloomberg View’s Andrew Zimbalist and Wollomans view of the stock market.