The article below was seen in the Baylor Business Review, a quarterly publication of Baylor University's Hankamer School of Business. I attend Baylor for 3 1/2 year from 1993-1996 where I graduated with a bachelor's degree in business administration with a focus on finance and accounting. In this article, I was interviewed to discuss the rising acceptance of hedge funds.

Finance to the Rescue

Problem: Realizing Superior Returns With Palatable Risk for the Ultra-Wealthy and Institutional Investors

Solution: Liongate Capital Management’s Multi-Strategy Fund of Hedge Funds

Innovator: Jeff Holland, Fund Founder, (Baylor University, 1996), summa cum laude finance and accounting graduate, C.P.A., Master’s studies in finance at the London Business School.

Traditionally, hedge funds have served the unique investment needs of high net worth, individuals, typically with savings of $1 million or more. The first one was started back on the heels of the 1929 stock market crash.

They’re instruments distinguished by strong returns, performance-based management fees, and often a personal investment by the manager that ensures his interests mirror those of his clients. The funds utilize a variety of instruments, not equities alone, and are not constrained against investing in foreign markets.

Assets Under Management On The Rise

Since about 2002, hedge funds have become viewed increasingly as mainstream instruments and have seen tremendous investor inflows, with the number of active funds increasing to an estimated 8,000. Assets under management are estimated to have swelled from more than $500 Billion in assets two or three years ago to over $1 Trillion today.

“Most of this growth came on the back of the tech crash in the equity markets,” offers Baylor Graduate Jeff Holland, who with Partner Randall Dillard, founded London-based Liongate Capital Management.

“Investors who lost money in equities realized things weren’t always going to go up and there was a lot of risk in the equity market. Many experienced sleepless nights during the 3-year slump in the equity markets. A lot of investors lost years of savings. Even the Baylor endowment lost significant value in those years. That’s a problem hedge funds can help solve,” Holland observes.

“At that point both high net worth investors and institutions became interested in hedging strategies as a way to protect themselves from the volatility they had experienced in equities in 2001 and 2002.”

A Paradigm Shift In Acceptance

Many consider the wider acceptance of hedge funds a paradigm shift in investing. Holland concurs. “Perhaps fifty years in the future, people will look back and say ‘Gosh, can you believe people used to buy stocks and not hedge their downside risk. It was so crude.’”

Liongate, which manages $250 Million for investors, operates a ‘fund of hedge funds’, an approach that is not unusual among hedge funds. Holland explains: “The general investment idea is that we’ll perform due diligence on hedge funds and then put them into a basket so others can come and invest. By selecting 25-35 hedge funds, each of which is pursuing a distinct investment strategy, we achieve a stable, diversified return.”