A $33 billion hedge fund shared 5 lessons that have shaped how it invests

Paul SingerWikimediaPaul Singer.

A $US33 billion hedge fund has some advice to share as its industry faces notable headwinds.

Elliott Management, an activist hedge fund founded by billionaire Paul Singer, laid out some of its major lessons in a private first-quarter letter to investors. A copy of the note was reviewed by Business Insider.

“Some of these lessons needed to be actually experienced to be incorporated at a deep level in the decision-making of a team, whereas others could be gleaned secondhand,” the hedge fund said.

Here are the five pieces advice, which the fund said came in no particular order:

  • “No security price is too high (or low) that it cannot go higher (or lower);
  • Turns in markets are impossible to time;
  • Big changes in market prices frequently occur far in advance of when the reasons for the changes become apparent, and by then it is too late to incorporate the new information into one’s trading at the old prices;
  • One of the most important reasons to avoid significant losses is to avoid the painful and sometimes terminal effect of severe adversity on the quality of money managers’ decision-making processes; and
  • A wide and deep education about the world, not just about capital structures, corporate business strategies and industry dynamics, is essential to the long-term success of money managers.”

These lessons “have shaped Elliott’s attitude towards trading, investing, predictability of markets, risk management and building an organisation,” Elliott added.

The hedge fund industry has been facing notable challenges, such as complaints from clients over high fees and underperformance, and several iconic funds, like Eton Park and Perry Capital, have shut down. Elliott, in its letter, laid out this backdrop in explaining what it had learned over the past several decades as it has grown to be one of the biggest players.

Elliott appears to be growing even more. The fund, which raised $US5 billion in less than 24 hours earlier this month, says it has been building up its cash reserve to deploy during future market turmoil.

Elliott’s flagship fund, called EALP, has a compounded annual return of 13.5% since launching on February 1, 1977, according to the letter.

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