Fund selectors discuss attributes, tail risk and liquidity
Fund selectors have had their say on issues such as attributes of managers, tail risk, liquidity challenges for hedge funds, and issues of choosing third party funds.
When selecting strategies for 47 Degrees North Innovation fund, what key attribute do you seek in managers?
Fraser McKenzie (pictured), managing partner from 47 Degrees North Capital Management Ltd says: “The differentiating and winning factor is the ‘value proposition’ of each strategy. That has almost nothing to do with the group, or the individual fund manager, whom we can meet any number of times.”
“For us, it is all about the structure and the delivery of the portfolio, the core processes.”
One of McKenzie’s favourite books is Alex Bellos’ Here’s looking at Euclid, which celebrates the legacy of the Greek mathematician/philosopher, and looks at the spatial relationship and ratios between factors, rather than their linear connection.
McKenzie is looking for traders who instinctively understand that logarithmic scale, and for fund firms that can capture and maintain that process.
Tail risk events seem to be happening ever more often, but are they not expensive to hedge against?
Jean-François Bacmann, head of overlay strategies from Man Systematic Strategies says: “The frequency with which these extreme market moves occur is often significantly underestimated by market participants.”
“Recently for example, events such as the collapse of Lehman Brothers, the Greek bond crisis, or the aftermath of the Japanese earthquake, amongst others, have clustered at unforeseen pace.”
“Like any type of insurance, tail risk protection is likely to confer some cost in more tranquil periods.
“However, these costs occur when portfolios structured around risky assets and alpha should deliver strong returns anyway.
“Moreover, while carry costs may be impossible to avoid, they can be actively managed by dynamically adjusting the level of protection through time, as well as by searching for cheaper, but still reliable, insurance.”
How important is meeting managers?
Jan Tore Bergh, chief investment officer alternative investments and fund selection from Storebrand Kapitalforvaltning says that deliberately ensuring some people in his team do not meet managers is an important part of the selection process.
This is to ensure another layer of checks and balances in the selection process.
The process otherwise emphasises the common practice of engaging with the manager, as well as due diligence on the product and management firm.
Engagement usually takes the form of several meetings, including inspecting the workplace, and holding in-depth interviews with more than just the manager.
To ensure a detached view on the manager, however, Bergh insists at least one person on his team does not engage with the manager on a personal level ‘the need to stay detached from the human factor in the process’.
This means when final discussions occur to decide whether or not to invest, there is always somebody who can speak up from that point of view.