- 1). Develop absolute return portfolio strategies. Investors allocate capital to hedge funds to reduce the total risk in their portfolio and to enhance their returns. The key to delivering superior risk-adjusted returns is identifying sources of alpha in the financial markets. Investment skill and market insight can lead to returns in excess of benchmarks or standard market indices, or investment returns can be in line with expectations but with much lower volatility.
- 2). Recruit premier talent from academia and industry. The most successful emerging hedge funds focus on recruiting exceptional people to their team. Since human capital is so valuable to developing trading and investment strategies and to connecting with capital allocators, attracting the premier talent from academia and industry is a priority for small hedge funds. Thus, hedge funds are very selective in hiring and are notorious for extensive background checks and lengthy interview processes.
- 3). Communicate with existing investors. The best arbitrage strategy in the world is useless without adequate capital to execute it properly. Thus, to maintain the trust of your investors and provide them with perspective on their quarterly account statements, many funds periodically issue an investment letter describing recent successes and challenges and those on the horizon. Also, it is important to respond to incoming phone calls from interested and concerned investors, because although the details of the fund's strategies may be proprietary, there needs to be some degree of transparency and accessibility with management for successful investor relations.
- 4). Raise additional outside capital from new sources. Small hedge funds need to actively grow assets under management to survive. Even loyal early investors may need to redeem their investment on short notice, and a fund simply cannot operate without adequate investment capital. Thus, to diversify against the risk of redemptions and to grow the asset base in general, small hedge funds should dedicate a meaningful portion of their resources toward marketing the fund to new investors.