The starting point for prudently evaluating and investing in hedge funds is to recognize that the multitude of strategies generally labeled as hedge funds can be grouped into two primary classes - true hedge funds, and nominal hedge funds. These primary classes are fundamentally different from one another, with entirely different risk/return dynamics. Investors who fail to recognize this distinction are likely in for unpleasant surprises.

In 1996, LMC published the only hedge fund classification system that recognizes the fundamental distinction between true and nominal hedge funds. Through 2004, we knew of no other system that makes this critical distinction.

This article is the most recent introduction published for LMC’s classification system for hedge funds. The book, edited by Ron Lake, contains 42 chapters from different authors, and provides useful insight into all aspects of hedge funds.

“Time Capsule Opinion” was published at the end of 1996, inviting readers to set the article aside, and to reassess the author’s rational a decade later, in 2007. The thesis was that selecting an investment manager with superior performance for the following decade is a low probability endeavor. However, selecting a skillful manager committed to conservative Jones model investing significantly increases the odds!

In December 1996, Ted Caldwell wrote the following:
“As is, Maverick is an odds-on favorite from among the thousands of investment managers in operation, to deliver distinctly superior performance with relatively low volatility over the next decade… So there you have it. Our opinion is that, a decade from now, investors who chose to commingle assets with Lee Ainslie at the beginning of 1997 will have experienced immense gratification. Since our reasoning for this opinion is indelibly based on his understanding and execution of the conservative Jones model, Lee’s future should be instructive for us all.” The article explains the rational for this ten-year prediction.

A Primer Hedge Funds is LMC’s somewhat dated reprint of the introduction Ted Caldwell was asked to write for the 1995 Irwin book on hedge funds for institutional investors. It still makes enjoyable “airplane reading” for some.

LMC’s Recommended Classification Name.

This 1998 article on hedge fund classification published by Investment policy simply presents another approach to why proper classification of hedge funds is necessary.