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Four Ways to Monitor after Purchase

By Dr. David Edward Marcinko MBA, MEd, CMP™

SPONSOR: www.CertifiedMedicalPlanner.org

[Publisher-in-Chief]

Hedge funds (broadly defined as private investment vehicles that trade a variety of long and short equities, derivatives, futures contracts, and options in a variety of capital markets) have grown in size and importance in client portfolios because of superior performance, until late [2008-09 and 2022], and readily available investor capital.

Risk Factors

Physicians and clients often ask us to assess certain risk factors and a variety of investment entity structural characteristics associated with hedge funds. Accordingly, we must often be involved in discussing clients’ specific risk/return desires and expectations as they consider such investments.

Four Key Post-Investment Issues:

1. A change in core investment strategies or risk postures from those which are documented in the investment policy statement—Among these are the specific markets to be traded, the degree of financial leverage to be employed or allowable, the underlying instruments or contracts to be used, and the investment strategies to be pursued under various conditions. Hence, there is no substitute for careful and regular assessment by the planner of changes in how and what an investment manager is trading and communication of such to the client.
2. Use of financial leverage can dramatically increase returns just as poor performance can be accentuated—The key issue for the planner is whether a given investment manager’s use of leverage changes over the life of the hedge-fund investment, thereby possibly affecting the client’s initial desired risk/return profile.
3. The composition of the performance return, particularly with respect to the long-term capital gain component.
4. Asset growth—Regularly monitor and evaluate whether it is detrimental to performance and capable of causing an erosion of performance over a long-term horizon.

Assessment

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Often, after a hedge-fund investment has been made, if performance over time is good (or even adequate), both the doctor client and the financial advisors or planner may assume that there has been no material changes in investment strategy or structural characteristics that warrant attention or concern. Such changes often occur subtly over time and, if performance erodes, and the client may feel that the planner did not adequately monitor the investment. Hence the necessity for the above warning post

Note: “Post investment Issues Regarding Hedge Funds,” by Richard L. Fisher, Personal Financial Planning, November/December 1996, pp. 14–19, Warren, Gorham & Lamont, 1-800-950-1205.)

Conclusion

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Filed under: CMP Program, Financial Planning, Investing, Marcinko Associates, Portfolio Management | Tagged: CMP, david marcinko, financial leverage, hedge funds, Marcinko, private investment vehicles, www.certifiedmedicalplanner.com | 17 Comments »