Getting Started in Hedge Funds
Daniel A. Strachman · 2005 · 210 pages
This is not a trading book. It is a tour of how hedge funds are structured, regulated, and sold, told through interviews with seven managers and the people who allocate to them. Read it to understand the plumbing, not to learn how to trade.
The one idea
Strachman's real subject is access: who gets into a hedge fund, on what terms, and how the industry around that access actually works. He walks through the legal wrapper (limited partnership or LLC, onshore versus offshore), the investor qualification rules that gate who can even write a check, and the standard 1-and-20 or 2-and-20 fee split that pays the manager. None of this is a trading method. It is the institutional scaffolding a reader needs before they can evaluate any hedge fund claim.
The second half of the book is profile-driven: seven managers describe their strategies in their own words, followed by five investor types (an independent adviser, a pension fund, a third-party marketer, a wealthy family office, and a manager-of-managers firm) describing how they pick funds. The throughline across all of them is due diligence as a filter, not a formula. Cambridge Associates takes about one in ten funds that call, and roughly one in ten of those makes the cut after in-person review. Parker Global tracked over 2,000 managers in its database in 2005 and still says it finds managers through relationships, not the database.
The book's implicit argument is that hedge funds are not a monolith and the popular narrative (secretive geniuses making outsized bets) obscures the mechanical reality: a fund is a legal entity with specific investor eligibility rules, a fee structure, and a manager who has to raise money like any other small business owner. That framing is useful. It does nothing to help a reader evaluate whether a specific fund's strategy will work.
What it actually teaches
The book's closest thing to a repeatable process is the gatekeeping sequence institutional allocators use to select a fund, described through Lake Partners, the anonymous $35 billion pension fund, and Cambridge Associates.
CONFIRM ELIGIBILITY FIRST
Under the regulations in force when this edition was written, a hedge fund investor had to be an accredited investor: $1 million net worth including a primary residence, or $200,000 in annual income for two consecutive years ($300,000 for a couple) expected to continue. Funds that wanted more than 100 limited partners after a 1996 rule change had to restrict new investors to qualified purchasers instead: a trust, individual, or family company with at least $5 million in investments, or an entity investing at least $25 million on a discretionary basis. This gate comes before any strategy discussion.
SET THE PORTFOLIO ROLE BEFORE THE MANAGER SEARCH
Ron Lake of Lake Partners insists the first step is deciding what job the hedge fund allocation is doing in the broader portfolio (return enhancement, risk diversification, or both) before naming a single fund. The pension fund profiled in Chapter 4 applied this by capping any single fund at 20 percent of its total assets and sizing new positions at $50 million to $100 million, deliberately avoiding funds too small to be worth the operational overhead.
SCREEN ON STRATEGY EDGE, NOT PEDIGREE
Cambridge Associates, described as the most prestigious hedge fund consultant in the book, says it looks for managers working an inefficient corner of the market, because a 1-and-20 or 2-and-20 fee (a 1 to 2 percent management fee plus 20 percent of profits) is not worth paying for a manager who could be replicated by buying a large-cap stock outright. The firm gets 30 to 40 cold calls a day from funds and takes roughly one in ten to an in-person interview; about one in ten of those becomes a client recommendation.
VERIFY OPERATIONALLY, NOT JUST ON RETURNS
Virginia Parker of Parker Global Strategies, a manager-of-managers, requires a detailed questionnaire, an operational and risk due-diligence visit, and reference checks before funding a manager, then marks every position to market daily (weekly for illiquid holdings) for the life of the relationship. Her contracts specify leverage limits, value-at-risk limits, and even which counterparties a manager may trade with, with next-day redemption rights if the manager breaks the agreement.
SIZE FOR CONTROL, NOT JUST DIVERSIFICATION
The book repeats a specific cautionary point: fund-of-funds investors who lack Parker's contractual controls can be trapped when a manager drifts outside normal markets, because by the time a redemption notice clears, the assets are already gone. The lesson given is to prefer structures (separate accounts, tight contracts, frequent marking to market) that let an allocator exit fast, over structures that only look diversified on paper.
What it looks like Monday morning
A reader who is actually being pitched a hedge fund allocation walks away with a checklist: confirm which investor category they qualify under (accredited investor versus qualified purchaser), ask directly what percentage of the manager's book is long versus short and what the net exposure is, and ask who marks the positions to market and how often. None of that requires math, and none of it appears in most fund marketing decks unprompted.
A reader hoping to trade like a hedge fund manager gets nothing to do differently on Monday morning. The book describes what managers say about their strategies in interviews; it does not teach the mechanics of any of those strategies well enough to replicate them.
| Category | Individual threshold | Notes |
|---|---|---|
| Accredited investor | $1M net worth (incl. primary residence) or $200K/$300K couple income, 2 years running | Minimum bar to invest in most funds pre-1996 rule change |
| Qualified purchaser | $5M in investments (individual/trust/family company) | Required once a fund exceeds 100 limited partners |
| Qualified purchaser (discretionary) | $25M invested on a discretionary basis | Applies to entities investing on behalf of other qualified purchasers |
Verify all three figures against current SEC rules; this table reflects only what the book states for its 2005 printing.
People spend more money picking out the color of their refrigerator than they do on picking stocks.Daniel A. Strachman, quoting Peter Lynch, in Getting Started in Hedge Funds
Where it fails
- It is a 2005 regulatory snapshot, not current law. The accredited investor thresholds ($1 million net worth, $200,000/$300,000 income) and the qualified purchaser figures ($5 million individual, $25 million discretionary) are stated as the rules in effect when this second edition went to print. The SEC has since revised accredited investor qualification (adding professional certifications as a path, and in 2020 excluding a primary residence from the net worth test in ways this book does not anticipate). Anyone using this book to check their own eligibility needs to verify against current SEC rules, not this page.
- The strategy descriptions are marketing copy, not method. Each of the seven manager profiles in Chapter 3 is built from an interview in which the manager characterizes his own edge in favorable, unverifiable terms. There are no position-level examples, no worked P&L, and no losing trades shown in detail. A reader cannot use this book to evaluate whether any of these strategies actually worked, only to hear how the manager described it.
- Survivorship runs through the case studies. The book's closing story about Edgehill Capital turning $45,000 into $125,000 for one investor is presented as illustrative of the industry, but the same page notes the fund closed to investors in 2004 after failing to recover from the tech bubble. LTCM, the book's other headline example, nearly took the financial system down with it in 1998 despite a partner roster of Nobel laureates. The book names both outcomes but does not weigh them against each other when making its case for the industry.
- It assumes an allocator's checkbook, not a trader's screen. The entire practical content is written for someone choosing which multimillion-dollar hedge fund to invest in, whether that is a $35 billion pension fund, a family office, or an individual meeting the accredited investor bar. It has nothing for a retail trader who wants to run a hedge-fund-style strategy in a personal account with tens of thousands of dollars, and it says nothing about what capital or infrastructure a manager needs to launch a fund of their own beyond a track record and 'guts.'
- The 'Managers' chapter buries the one section with real numbers. Chapter 3's seven manager profiles run over 50 pages of narrative and quotes with almost no hard figures. The one section with real numbers, on leverage mechanics (a 75 percent long / 25 percent short fund is only net 50 percent long, but a 125/75 version carries the same net exposure with shorts working 1.7x as hard instead of 3x), sits inside Chapter 2 under a subhead most readers would skip if they were hunting for manager insight.
Who it is for
Buy it if
You are being pitched an allocation into a hedge fund, sitting on an investment committee, or trying to understand the regulatory and fee mechanics (accredited investor rules, LP structures, 2-and-20) before that conversation happens. It is also a reasonable primer for someone who wants the industry's own vocabulary explained in plain terms.
Skip it if
You are looking for a trading method, a system to run yourself, or any quantitative edge. Skip it too if you already know the difference between an accredited investor and a qualified purchaser and have read a fee structure before; there is no additional payoff once the basic mechanics are familiar.
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