How I Choose Funds (Even Though I Prefer Picking Stocks)
Two stories caught my attention over the past few weeks.
Situational Awareness LP (SAF) collapsed after a forced liquidation. Korean retail investors took heavy losses on leveraged single-stock ETFs tied to AI names.
Both trace back to the same AI and semiconductor correction I wrote about last week — including some of my own stock picks. So the lesson here isn’t that funds are riskier than stocks.
What actually separated SAF and the Korean ETFs from an ordinary drawdown was structure. SAF’s own terms forced a liquidation, so its investors never got the choice to wait out the correction. A leveraged ETF resets daily, so a sharp move compounds against you rather than just costing you the underlying decline.
Structure turned an ordinary correction into a permanent loss. That’s really what caught my attention.
If you’ve read this blog for a while, you’ll know I spend most of my time on stock picking. I like doing the work of deciding whether I want to become a shareholder in something. What I don’t talk about much is that alongside all that stock picking, I also hold several public and private funds.
That sounds a bit contradictory. If I enjoy picking stocks, why pay someone else to invest for me?
The honest answer is that there are places where I think someone else simply has a better edge than I do. My position in the Hamilton Lane Senior Credit Opportunities Fund is a good example. I have no ability to source hundreds of private loans, negotiate lending terms, monitor borrowers, or build a diversified senior secured credit book on my own. That’s not a retail investor’s toolkit.
So the choice was straightforward. Skip the asset class entirely, or find a manager I trusted to do it better than I could. I went with the latter.
Conviction gets tested when the headlines turn negative
Private credit had a rough run of headlines earlier this year — questions about whether the industry had grown too fast, whether cracks were forming underneath the surface. I had a few conversations with friends during that stretch who all asked some version of the same thing: was I worried about my private credit position?
My answer didn’t change. I wasn’t redeeming out of Hamilton Lane.
Not because I think private credit is risk-free. Not because I assume every manager in the space is equally disciplined — I don’t. It came down to something simpler: I trusted the manager I was in.
My read at the time, and still now, was that the problems making headlines were manager-specific, not asset-class-specific — isolated to how certain managers had underwritten, not representative of private credit funds globally. Not every bank underwrites the same way, and not every private credit manager does either. A disciplined manager does the due diligence before extending credit and is willing to walk away when the risk isn’t worth the extra yield. That’s the job I’m paying Hamilton Lane to do.
None of that means the risk disappears. Borrowers can still default. Recoveries can still disappoint. Markets can still weaken.
But there’s a real difference between accepting investment risk and accepting poor underwriting. That distinction is what kept me comfortable holding through the noise.
The due diligence doesn’t disappear, it just moves up a level
The obvious problem with a fund like this is that I can’t do the analysis I’d normally do. I can’t look at every underlying loan, I don’t know every borrower, I can’t sit across from every management team. So instead of analysing the investments, I analyse the process — the manager, the structure, the fit.
Over time, I’ve realised I tend to ask myself the same few questions before investing in any fund.
The first thing I ask myself is surprisingly simple: why does this fund deserve a place in my portfolio? I wasn’t looking for another equity fund when I bought into Hamilton Lane. I wanted private credit exposure through a specialist with scale and access I couldn’t replicate myself. If I can’t explain in a sentence why this fund and not something else, I’m not ready to write the cheque.
The second question is one most investors probably don’t ask until it’s too late: what happens if things go wrong? SAF and the Korean ETFs are the reason this question sits where it does in my process — both were reminders of how much structure actually matters. Can the manager gate or suspend redemptions, and under what conditions? Is there leverage inside the fund, and does it reset daily or sit fixed on the balance sheet? Does the fund’s liquidity actually match the liquidity of what it holds? Private credit is illiquid by nature, so a fund promising monthly redemptions on illiquid loans is telling you something about how those redemptions get funded, and it’s usually not good.
Only after that do I think about the manager. Historical returns are useful, but they’re usually measured during periods when markets were supportive. I’m more interested in understanding how a manager behaves when conditions become more challenging — which is why I paid closer attention to how Hamilton Lane talked about underwriting discipline during the private credit scare than to their historical returns. I also want to know if their own capital sits alongside mine. That’s the cleanest alignment check there is.
The last question is whether I’m paying a sensible price for the exposure I’m getting. This applies to funds just as much as stocks. A good manager and a sound structure can still be a bad buy if you’re entering off the back of a strong run. Rising NAV or a hot streak of returns can hide the fact that you’re buying at the peak, and no amount of manager quality fixes a bad entry point.
None of these questions guarantee a good outcome. What they do is make sure I’m taking risks I actually understand, instead of risks I never thought through.
Buying a fund doesn’t remove the need for due diligence
Situational Awareness blowing up doesn’t mean hedge funds as a category are broken. The Korean ETF losses don’t mean ETFs are broken. A rough quarter of private credit headlines doesn’t mean every private credit fund is heading for trouble.
Every fund carries its own risk. The mistake is assuming that buying into a fund means someone else has already done the thinking for you. They haven’t. It changes where I spend my time doing the due diligence, not whether I need to do it.
When I buy a stock, I’m asking whether I trust that management team to execute. When I buy a fund, I’m asking whether I trust the manager to allocate capital well. Same instinct, different job.
After finishing this piece, I came across another post-mortem on the Situational Awareness collapse. It landed on a similar conclusion — the real lesson wasn’t the AI thesis itself, but how leverage and fund structure turned an ordinary correction into a forced liquidation. Good to know I wasn’t the only one reading it that way.
Whatever corner of the market is under scrutiny — private credit today, hedge funds and leveraged ETFs tomorrow, something else after that — the questions I ask before putting money into a fund shouldn’t change with the headline.
It is not financial advice. The author may hold positions in securities discussed. Readers should conduct their own due diligence and consult with a qualified financial advisor before making investment decisions.