Tag Archives: Principal Character Analysis

Hedge Fund Team & Principal Character Analysis?

Hedge Fund Team & Principal Character Analysis?

It is interesting in this industry full of objective criteria, minimum $AUM levels, preferred track record lengths, exact amounts of acceptable volatility, and dozens of ratios to consider that two things are true at once:

1) That almost every investor says at the end of the day the team is what is most important.

2) That teams are judged using criminal background checks and a “gut feeling” for whether they are to be trusted with $ millions.

I think that teams should be analyzed and judged based on a number of factors which are systematic and diverse if not at least somewhat objective so that the gut feelings of the analyst or chief investment officer is not what an investment decision of a “go” or “no go” rides on.

Do you agree that this issue needs more attention?

 

There is a lot of value in gut feeling, see Malcolm Galdwell’s book “Blink” which quantifies the power of what he refers to as “thin slicing” information. That said, I agree that a systematic approach preferred, even if one of the components is “gut” feeling”. I’m impresses by our investors who analyze funds as if they were investing in a business; which they are. The alpha a company generates tomorrow is a function of what questions the team asks of themselves, continued reinvestment into the business, introspection, humility, brutal honesty – both individually and collectively…plus a ton of other items, including luck. I’d sure want to know what mistakes a manager has made, how they handled them, what they learned, and what has been implemented to avoid repeating. While this type of information is difficult to quantify, It can certainly be approached systematically.

 

This issue does need more attention. You have to be able to trust the management as the GP is responsible to the LP. What ostensibly are the proposed portfolio holdings, the asset classes? What is the strategy and is there a risk management system? Is there any algorithm involved? I think these questions show whether the fund owner (GP) has a well thought out conception of how the fund will be operated. I believe the ‘gut feeling’ from a seed investor and other accredited investors is a function of the risk involved in reaching the funds proposed rate of return. Applied behavioral foundations related to management remain primary to effective risk management. A positive sign for a seeder or accredited investor is if one or more of the fund managers possess qualified training in management.

 

This is in part the topic of my presentation that I do for various regional chapters of the CFA Institute as part of their Speaker’s Bureau. Happy to visit with your local chapters!

 


I agree in trusting your gut feeling to a degree, but sine that is not enough to judge the strength of a risk management system, an investment process, whether someone has committed a crime in the past, etc… I just question whether gut alone is enough while allocating $10M to a fun manager. It seems very UN-sophisticated in our sophisticated investment environment.

Hello Bob,

Thanks for the comment, perhaps we can trade notes as this is something I also speak about at conferences for family offices and on alternative investments.

I’m also including a section in my new book coming out through Wiley in 2012 called “The Family Office Book.” This section is called “The 6 C’s of Character Analysis” and that is where I provide my top 6 ways that you can judge and evaluate someone’s strength of character and level of integrity. I’ll share that once it is available for print this Q1 of 2012.

Thanks for everyone’s comments so far.

 

 

NOTE I now post my TRADING ALERTS into my personal FACEBOOK ACCOUNT and TWITTER. Don't worry as I don't post stupid cat videos or what I eat!

Hedge Fund Team & Principal Character Analysis?

Hedge Fund Team & Principal Character Analysis?

It is interesting in this industry full of objective criteria, minimum $AUM levels, preferred track record lengths, exact amounts of acceptable volatility, and dozens of ratios to consider that two things are true at once:

1) That almost every investor says at the end of the day the team is what is most important.

2) That teams are judged using criminal background checks and a “gut feeling” for whether they are to be trusted with $ millions.

I think that teams should be analyzed and judged based on a number of factors which are systematic and diverse if not at least somewhat objective so that the gut feelings of the analyst or chief investment officer is not what an investment decision of a “go” or “no go” rides on.

Do you agree that this issue needs more attention?

There is a lot of value in gut feeling, see Malcolm Galdwell’s book “Blink” which quantifies the power of what he refers to as “thin slicing” information. That said, I agree that a systematic approach preferred, even if one of the components is “gut” feeling”. I’m impresses by our investors who analyze funds as if they were investing in a business; which they are. The alpha a company generates tomorrow is a function of what questions the team asks of themselves, continued reinvestment into the business, introspection, humility, brutal honesty – both individually and collectively…plus a ton of other items, including luck. I’d sure want to know what mistakes a manager has made, how they handled them, what they learned, and what has been implemented to avoid repeating. While this type of information is difficult to quantify, It can certainly be approached systematically.

 

This issue does need more attention. You have to be able to trust the management as the GP is responsible to the LP. What ostensibly are the proposed portfolio holdings, the asset classes? What is the strategy and is there a risk management system? Is there any algorithm involved? I think these questions show whether the fund owner (GP) has a well thought out conception of how the fund will be operated. I believe the ‘gut feeling’ from a seed investor and other accredited investors is a function of the risk involved in reaching the funds proposed rate of return. Applied behavioral foundations related to management remain primary to effective risk management. A positive sign for a seeder or accredited investor is if one or more of the fund managers possess qualified training in management.

 

 

 

This is in part the topic of my presentation that I do for various regional chapters of the CFA Institute as part of their Speaker’s Bureau. Happy to visit with your local chapters!

 

 

NOTE I now post my TRADING ALERTS into my personal FACEBOOK ACCOUNT and TWITTER. Don't worry as I don't post stupid cat videos or what I eat!