When Peter J. Creedon evaluates hedge funds, he looks for managers who have good track records that exceed their benchmarks by 25 percent.
“I use them for my clients who are accredited investors willing to take greater risk to gain a higher rate of return,” says Creedon, a financial advisor with Crystal Brook Advisors in New York.
First, Creedon evaluates a hedge fund’s speciality and considers whether the fund invests domestically or internationally. He also assesses how to rebalance a client’s portfolio if he’s going to add the fund to the mix. “If I am trying to take more risk for greater return by investing in a hedge fund, I need to know in advance where I can balance off that risk in another part of the portfolio,” he told Financial Advisor.
It’s tempting to dismiss the potential value that hedge funds can bring to a portfolio, but Creedon is among the advisors who are digging deeper to find hedge funds that are outperforming. “It’s about cost versus risk versus return when I’m choosing hedge funds,” he said.
Creedon reads the offering letter of a hedge fund first and then asks to see the manager’s trades. “I like to see where they are trading to make sure it’s real, but it’s easier to access that information from smaller hedge funds than the larger ones,” Creedon said.