Manager selection is both an art and a science. Scientific analysis, judgement, experience and instinct all play a vital role.
The key to successful Manager Selection is to find managers who work as trusted agent and partner for their investors. No other relationship works
2. Goal: Performance Maximization
● Performance Maximization is achieved by selecting managers who
outperform a rising market. The result is a combination of positive
market returns plus added manager alpha.
● To achieve this goal the investment approach needs to combine two
processes: (1) to identify markets or stories likely to deliver positive
performance and (2) to search out managers who add alpha to that story.
● Every story and every manager has a benchmark index - either a widely
published index or ETF or composite
3. The First Process:
Identifying Investment stories
● Capital Markets exist in a constant state of flux within which investors seek
market opportunities
● When investing you need to look forward and have a view; changes in market
opportunities and changes in weightings reflect adjustments of that view
● Hedge Funds are merely instruments to access market opportunities
● So the starting point - before selecting a hedge fund - is to find the market
opportunities
● We call market opportunities “investment stories” or “themes”
4. The Second process:
Finding managers that produce added alpha
● We look for talent - practice brings you to a certain level in sports, music
and investment management but we want gifted managers with the X-
factor
● We research the vapour trail an individual left in the market - their
performance and reputation
● We de-lever hedge fund returns and substract market performance to
analyse for alpha
● We allocate larger amounts to better performers
5. A Typical Preferred New Manager Profile
● A team of five or more where the key Portfolio Manager had formative previous
experience
● Partners are contributing complementary skills including a COO with a culture of
duties segregation
● The firm is aiming for controlled growth with a pre-determined AUM close
● An investment process that is clear and has a sustainable edge
● AUM of +$50m with evidence of meaningful alpha generation
7. Sourcing
● Our personal networks
● Current and past hedge fund managers
● Prime Broker capital introduction events
● Third party marketers
● Databases
● Industry press
Sourcing IR Contact HFFP
CIO
Contact
QA HFIC
8. IR/ PM First Contact
● First contact
○ On-site at our offices, telephone conference call, or industry conference
○ Possible visit to their offices
● Early assessment of the people and process
○ Suitability for existing or new portfolio theme
○ Good credentials, good process, well structured
● Early veto
○ People: poor credentials
○ Process: unsuitable strategy, poor risk management
○ Paperwork: poor construction and/or terms
○ Performance: invisible alpha
Sourcing IR Contact HFFP
CIO
Contact
QA HFIC
9. HFFP
● Hedge Fund First Pass (HFFP) assimilates and documents
o Includes all meetings/conversations conducted by the inhouse investment managers
o Captures all Hedge Fund documentation (OM, DDQ, presentations, risk reports)
● HFFP represents an objective statement of facts, in 25 pages
● HFFP follows 4 “P”structure:
o People
o Process
o Paperwork
o Performance
Sourcing IR Contact HFFP
CIO
Contact
QA HFIC
10. PM/CIO Contact
● HFFPs are reviewed by the Investment Team, discussed and critiqued
● If a Hedge Fund clears this process the inhouse CIO and PMs meet (or re-meet) the
HF key risk taker and risk managers for more detailed discussions and questioning
● A companies visit to the manager´s offices is a pre-requisite to investing, so this
stage always take place on-site at the manager´s headquarters
● This qualitative research is detailed, tailored to the HF and very extensive
Sourcing IR Contact HFFP
CIO
Contact
QA HFIC
11. Quantative Analysis
● Benchmark indices/ETFs are defined
● Detailed primary portfolio asset exposure and weighting data along with
performance data is collated
● Quantitative Analysis then evaluates
o Return distribution
o Loss control
o Volatility profile
o Correlation
o Alpha generation
Sourcing IR Contact HFFP
CIO
Contact
QA HFIC
12. Manager Selection Process
● Hedge Fund Investment Case (HFIC) is the sequel of the HFFP. It gathers together all the
strands of prior work (HFFP, QA, ODD) and represents a subjective and judgemental
assessment of all aspects of the hedge fund.
● Strengths and Weaknesses are assessed and documented
● Multiple Key Factors are judged and scored
● The output represents the formal written case for investing in the hedge fund
● A forward looking risk section is completed and becomes the seed for ongoing manager
monitoring and re-assessment
Sourcing IR Contact HFFP
CIO
Contact
QA HFIC
13. Complementary Process
● Operational Due Diligence
o Backround checks
o Conducted by COO/CRO with absolute independence
o Service provider meetings and verifications
o Board composition and verifications
● Ongoing Manager Monitoring
o Questionnaires
o Data collection processes
o Quality of interaction and transparency
o Full process repeat for any managers held more than 5yrs
14. What (Fo)HFs should do to earn their
place in a portfolio
● In Good Times
o Must complement not duplicate
o Must add values (over and above the HFR Index)
o Must diversify effectively
● In Bad Times
o Protect Value in periods of Financial Instruments & Equity market decline
o Suppress volatility from FI & E
“To extend investment reach of the portfolio, increase the probability of profit and
deliver effective diversification at a fair cost”
15. Summary
Manager selection is both an art and a science. Scientific
analysis, judgement, experience and instinct all play a
vital role.
The key to successful Manager Selection is to find
managers who work as trusted agent and partner for
their investors. No other relationship works