Anthony Scaramucci - The Little Book of Hedge Funds: What You Need to Know about Hedge Funds But the Managers Wont Tell You

Contents

Little Book Big Profits Series

In the Little Book Big Profits series, the brightest icons in the financial world write on topics that range from tried-and-true investment strategies to tomorrows new trends. Each book offers a unique perspective on investing, allowing the reader to pick and choose from the very best in investment advice today.

Books in the Little Book Big Profits series include:

The Little Book That Still Beats the Market by Joel Greenblatt

The Little Book of Value Investing by Christopher Browne

The Little Book of Common Sense Investing by John C. Bogle

The Little Book That Makes You Rich by Louis Navellier

The Little Book That Builds Wealth by Pat Dorsey

The Little Book That Saves Your Assets by David M. Darst

The Little Book of Bull Moves by Peter D. Schiff

The Little Book of Main Street Money by Jonathan Clements

The Little Book of Safe Money by Jason Zweig

The Little Book of Behavioral Investing by James Montier

The Little Book of Big Dividends by Charles B. Carlson

The Little Book of Bulletproof Investing by Ben Stein and Phil DeMuth

The Little Book of Commodity Investing by John R. Stephenson

The Little Book of Economics by Greg Ip

The Little Book of Sideways Markets by Vitaliy N. Katsenelson

The Little Book of Currency Trading by Kathy Lien

The Little Book of Stock Market Profits by Mitch Zacks

The Little Book of Big Profits from Small Stocks by Hilary Kramer

The Little Book of Trading by Michael W. Covel

The Little Book of Alternative Investments by Ben Stein and Phil DeMuth

The Little Book of Valuation by Aswath Damodaran

The Little Book of Bulls Eye Investing by John Mauldin

The Little Book of Emerging Markets by Mark Mobius

The Little Book of Hedge Funds by Anthony Scaramucci

Copyright 2012 by Anthony Scaramucci. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Scaramucci, Anthony.

The little book of hedge funds: what you need to know about hedge funds but the managers wont tell you / Anthony Scaramucci. 1

pages cm.(Little book big profits series)

ISBN 978-1-118-09967-4 (hardback); ISBN 978-1-118-23707-6 (ebk); ISBN 978-1-118-22373-4 (ebk); ISBN 978-1-118-26204-7 (ebk)

1. Hedge funds. I. Title.

HG4530.S363 2012

332.64524dc23

2012005564

To my great kids, Alexander, Amelia, and Anthony.

I am so grateful that we are a part of each others journey, and I love the three of you with all of my heart.

Foreword

In 1972 Woody Allen filmed the funny movie Everything You Always Wanted to Know about Sex But Were Afraid to Ask. It has taken 40 years, but now finally Anthony Scaramucci has written the perfect and comprehensive manual on Everything You Always Wanted to Know about Hedge Funds But Were Afraid to Ask.

Using the laymans language and a wit that at times parallels that of Woody Allens comic genius as Anthony is a man who is as funny as he is smart. He provides the perfect primer on the esoteric world of hedge funds and their investment strategies. And being an insider who knows about hedge funds as much as anyone canby running a leading fund of hedge fundsAnthony can reveal in simple but clear and still profound terms the explanation of exotic terms such as alpha, absolute returns, shorting, hedging, leverage, and two-and-twenty. It is a true insiders guide to hedge funds.

In the process he discusses many important open and controversial issues. Is there true alpha? My answer is a partial yes, as there are a number of hedge fund managers who can provide superior uncorrelated absolute returns even if many others are just mimicking beta or do not have superior investment skills. So it does take a lot of work to pick the right managers, and that is the challenging role that funds of hedge fund can and should play.

Why has the industry become so big? Because in a world of low returns on traditional investments as zero policy rates are now the norm, there is a huge demand for higher absolute returns. And, until 2008, those returns were higher than those on traditional passive or even active long-only strategies. Given the massive losses that the industry faced in 2008 and 2009, an open question is whether those higher returns were based on superior skills or rather leveraged beta. The jury is still out, but there are certainly some managers who are consistently providing alpha (if at a steep set of fees).

Why are hedge funds interesting to institutional investors? Because in a world where returns on traditional investments are low and pension funds have large unfunded liabilities, the search for the holy grail of alpha can diversify risk and provide superior returns. However, we also know that when risk is off rather than onwhen tail risk implies high risk aversionall risky assets become perfectly correlated and there is nowhere to hide, even among hedge funds. So, again, finding better managers becomes key.

Finally, what is the future of the hedge fund industry? Most likely a shake-up: thousands of smaller and under-performing funds have disappeared in the past few years while the more successful players are consolidating and becoming bigger. But then the issue remains of whether successful funds can maintain alpha returns when they become so large that they can move markets or they run out of successful trading ideas.