New York (HedgeCo.Net) One of the hottest trends in the hedge fund industry is what is called a co-investment fund. Ironically, they are attributed to the hedge fund industry, but there isn’t anything about them that is hedged.

A co-investment fund has lower fees than a traditional hedge fund, the tie-up period is usually longer and the biggest difference of all is that the money invested goes in to one single investment idea. The manager is making one big bet on one idea. It is an all or nothing proposition for the most part.

Some of the prominent names that have participated with co-investment funds include Bill Ackman, Corvex, Jana, Magnetar and Trian. Bill Ackman used the strategy with his Target Venture fund and the result was a whiff.
The whole idea of a co-investment fund goes against the principles which the industry was founded on—hedging away as much risk as possible. In these cases, there is no hedging and the risk is equivalent to single-stock risk. No diversification, no hedge, nothing. It seems more like playing poker and going all in on a hand. Sure the odds may be stacked in your favor, but even pocket aces can lose.

We spoke with Steve Fauer, Chief Investment Officer at Pinnacle Capital Management and a manager on the HedgeCoVest platform to get his thoughts on co-investment funds. “There’s a reason for diversification. The surest way to have the absolute best performance on Wall Street is to invest in one single idea and be right. Unfortunately, the surest way to have the worst performance is to utilize the exact same strategy – and be wrong,” Fauer stated.