The Hedge Fund Lady Comes A-Callin'

BOOK REVIEW

A Practical Guide to Hedge Funds: How to profit in any market,” by Renata Neufeld, Toronto, Canada; Doubletree Press (Canada) Inc., 2004, 150 pages, US$14.95 (paperback).

TORONTO (HedgeWorld.com)–It is a safe bet that Renata Neufeld’s new book, “A Practical Guide to Hedge Funds: How to Profit in Any Market,” won’t top the New York Times best seller list any time soon.

However, it’s an equally good bet that dog-eared and Post-It Note-covered copies of this book will be turning up on the desks and bookshelves of investors for years to come.

Ms. Neufeld, who calls herself the “Hedge Fund Lady” and maintains a web site of that same name, has written a book that in simple and straightforward terms explains what hedge funds are and how they work in markets that in recent years have shown that big investment gains can be followed quickly by equally big investment losses.

Although Ms. Neufeld clearly thinks hedge funds have a place in almost any portfolio, the book manages to not come across as a sales pitch. Make no mistake: This book has been written from the perspective of a hedge fund advocate. Ms. Neufeld, a Canadian-based certified financial planner and investment adviser, started and later sold a boutique investment firm that offered the first hedge fund-linked notes in Canada. But just as she makes the case that not every hedge fund is a Long-Term Capital Management-in-waiting, Ms. Neufeld also spends time discussing the risks of hedge fund investing and important questions investors should ask.

Chapters 4 and 5 in the book really should be required reading for every journalist ever charged with writing a hedge fund story. Most reporters who do not write about hedge funds as part of their everyday beats usually get their descriptions of hedge funds only half-right. They make sure to play up the risks and the blow-ups and the fact that hedge funds presently are not required to register with the Securities and Exchange Commission as investment advisers. They also take care to note the occasional outsize returns some funds produce using leverage.

But as Ms. Neufeld points out in her book, and as most who work with the industry know well, most hedge funds are more like a scoop of vanilla ice cream than a triple-chocolate sundae. They tend to be less volatile than equity indexes and as a result they perform worse than those indexes when equities are hot and better than the indexes when equities are weak. In other words, most hedge funds produce consistent, if often unspectacular returns.

“That doesn’t mean I’m telling you to go out and sell everything you have right now and put it into hedge funds,” Ms. Neufeld writes in Chapter 3. “What I am saying is that if you want to reduce the overall volatility of your portfolio, but still want to be able to generate a return above T-bills, you can do that with hedge funds.”

Ms. Neufeld’s argument throughout her book essentially is that the long-only investment strategy most people have been taught and which they still follow doesn’t always work– and in fact is too volatile for most people’s risk tolerances.