How To Make Your Hedge Fund A Runaway Success, By Alphonse Fletcher Jr.

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One of the most wonderful aspects of the hedge fund industry is that because it attracts the brightest minds, said minds are constantly coming up with new and outside-the-box ways of doing things. Eventually the innovation catches on and before you know it, something that might initially seem crazy eventually becomes best practice at firms worldwide. Take Alphonse "Buddy" Fletcher Jr, for example. The hedge fund manager is the subject of a Wall Street Journal profile today that highlights what the paper describes as Fletcher's "unorthodox practices." While it's clear that some people are passing judgment on Buddy's ways of doing things, his wiser colleagues in the field will immediately recognize the genius found within and start furiously implementing his methods today. Such as:

Dealing with redemption requests: As many of you may have learned first hand, investors get fairly bent out of shape when you tell them they can't have their money back. But if you don't have the cash on hand, what's the alternative? One hedge fund manager recently said he would pay clients back not in actual money but in illiquid shares of a firm called LightSquared and in what seems to have come as a surprise to him, they didn't like that either. How does Fletcher deal with such issues?

Last month, after two of the pension boards sought to withdraw some of their cash, Fletcher instead sent them promissory notes "in satisfaction of this redemption request" that pledged payment within two years.

For those taking careful notes the steps are as follows: Step One: redemption request. Step Two: redemption granted. Step Three: investor says "what?". Step Four: manager says "What are you 'what'ing? You're getting your money, just later."

Let's continue.

Guarantees are your friend: Though it's true that investors can get pissy when returns don't meet or beat the guarantee, Buddy's got a simple way of dealing with such complaints:

In a March 2008 email to one pension executive, Denis Kiely, a former Fletcher deputy chief executive, called the 12% arrangement a "preferred return guarantee." Asked about that, Mr. Kiely said his use of the term "guarantee" was "colloquial" and not meant within "the legal definition."

For those who don't like to be so by the book, on this point you can get creative so long as you stick to the basic principle that words needn't be held to their actual "legal definition." Did you tell investors they were guaranteed a 25 percent return but at the end of year, for every dollar they put in the only got back ten cents? First off, posit that as good news (ten cents > zero cents) and with regard to the "guarantee," remind them the term was in the “buddy-buddy” or “just messing” sense.

Making math work for you: As any manager worth his salt will tell you, management fees are what will keep you warm on a cold wintry night. What not all managers know, however, is that you don't need to start charging outrageous fees to collect a nice chunk of change, nor must you figure out how to attract billions in assets to make that number times 2 percent worth it. Rather, simply consider a new way to come up with your firm's stated AUM. Here's how Buddy does it:

Fletcher reports it has more than $500 million of assets under management. But it appears to arrive at this figure by counting some assets more than once, according to the Journal's reporting, which involved examining more than 1,000 pages of investor communications and other documents obtained through public-records requests. A more orthodox way of measuring assets under management would produce a figure of about $200 million for one recent year.

That's just a jumping off point, of course. You could arrive at your figure however you'd like, so long as you're "meticulous" about it, as Fletch and Co say they are. Want to collect 3 percent of $1 trillion? We're not gonna stop you.

A Hedge Fund's Unorthodox Practices [WSJ]

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