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Who does the trading? Victor.


In Toronto? Yes, in Toronto.


So you’re based in Toronto ... Ye ... No, I mean no, we are based in New York. Everything is New York.


Are you registered with a regulatory agency? Yes, the USA. [Pause] New York.


Last I read you had $1 million under management. Has that changed? We still have a million, of course that money is with another 30 million that Victor controls, but that’s in Israel so we can’t say that. We have several more million of institutional money that we will have soon.


What returns can you show? We have high returns.


I saw you claim 18%. We don’t advertise your returns so you couldn’t have seen that [Note: it was actually from a video clip he had sent me himself]. We don’t talk about our returns, but it’s actually 19.7%.


This year? This year we are already at 10%, with the year not half done. 10% this early, we expect to have a very good year. At the same time I was able to track down Victor Plotkin, at home in Ontario. Here is our conversation:


Transcript of interview with Victor Plotkin, 2 p.m., 04/01/2011.


So Victor, I understand you are the trader


for the Genius Hedge Fund. Victor Plotkin: Yes, I am.


Can you tell us where you’ve worked before? I have 20 years experience, since 1991, mostly in the Israeli market.


Yes, but have you actually worked for someone? I worked in a portfolio management company with several other portfolio managers called “Alternativa.”


So in terms of the investment strategy at Genius, what sectors are involved in? We don’t do sectors, we are trading options. We set up a position where we profit on any market movements. We generate returns not just in advancing market, but a down one. In some ways, we are a safer investment than stocks.


uschess.org


But how exactly are you predicting market movements? We look at the historical data of volatility and estimate performance based on all possible outcomes.


So chess has no actual involvement in your strategy? [Chuckles] Of course not. My last partner was a chess player too, so maybe I think it’s good luck for me.


So what kind of returns can you show? Last year we make 20%, year before 40%. For the last three years, 30-35% annual return. So those are good returns. We definitely outperformed most other investment options.


Spectacular returns. How do you explain it? [Pause] I just have a really good feeling


for the market, and my option strategy just really works for me.


So what exactly are you hedging? Ahh, we hedge benefit to risk. This way we profit either way. Actually what I should say is I set up our position for one movement in the market, then if the market goes another way, I adjust our position by the hour or even minute, so there is not much risk.


So you’re day trading? No, not exactly day trading. It’s more that we adjust our risk minute by minute. As you know, options trading is often risky, and I’d say 80% of our investment strategy involves reducing risk.


Thanks for a few minutes, Victor! Chess Life — July 2011 39


HOW TO EVALUATE A HEDGE FUND


Proceed in stages of progressive discovery that overlap, attack different angles and funnel to a focused, clear evaluation of the prospect. Early stages should include:


Review of the investment summary provided by the manager (i.e., that PowerPoint flip chart presentation they gave you). Look for the track record and seek independent corroboration. The more impressive the story, the more you should expect to see an independent audit. At a mini- mum you should review the work papers used to create the track record.


Listing the fund’s entities and people. Create a due diligence file for each, just like the banks do for Patriot Act and Anti-Money Laundering Compliance. The fund’s management should have it on file. Prior litigation? Then read the dockets and filings!


Making sure the fund has a reputable, independent fund administrator with deep pockets. Contact the administrator to verify key data from your due diligence file. Verify wiring instructions and, most importantly, make sure the investment manager’s power over the funds is limited to execute “delivery-versus-payment” transactions. The administrator, not the manager, should control any net money wires out of the fund.


Supposing that PowerPoint printout hasn’t landed in the waste bin yet, now you have to decide on formal due diligence. There are a broad literature and variety of consulting services at your disposal. For example, you can:


Hire a field examination firm with the requisite asset expertise to spend a day at the hedge fund. They can select a few investments and audit their documentation, history and val- uation with fund management and counter-parties. Such an approach can reveal more about fund management than reading responses to questionnaires. A field exam can also verify how well man- agement collects and reconciles cash. Cash operations might sound like a dry subject but is a critical indicator of a manager’s ability to handle growing assets under management and weather volatility.


Analyze the investor structure of the fund and build a spreadsheet. Do any patterns emerge? Are a substantial amount of investor funds available for redemption? How liquid and leveraged are fund assets? Has performance flattened out over the last six months? How big are the largest three investors as a percentage of the fund? What is the ratio of contributions versus with- drawals and net asset value? Was an old fund rolled into the current fund?


Do a gut check on management. Does management have experience protecting a similar fund and its investors during major market meltdowns? Do they have experience during market deba- cles such as those in 1994, 1997-1998 or 2007-2009?


~ Dr. Jonathan Knight


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