Corestone Investment Managers, a multi-manager based in Switzerland, has said that any strategies it looks to invest in must be able to provide full transparency, otherwise it will not invest
Senior analyst Jens Pongratz says: “The last few years have highlighted that the manager selection process needs to adjust and offer increased transparency, better risk management and a clear understanding of what is going on in the portfolio.”
The Zug-based firm hinges its manager selection on a proprietary platform. All holdings and underlying investments in a manager’s portfolio are entered into this platform, which allows Corestone to analyse portfolio exposures and providers increased transparency.
Pongratz says the firm is now using data as much as possible to back investment decisions. He defines this process as a “mix between quantitative and qualitative analysis”. Managers are selected within the context of a given portfolio, so the firm does not have a standard list of managers without taking into account the client’s specific situation.
Key to this is the due diligence process, which consists of various steps. Firstly, the manager is accessed on its stability, resource structuring, investment team and decision making process. Sadruddin Rejeb (pictured), head of research and a co-founder of Corestone, says: “Investment is not possible without having seen in practice what the manager is doing.”
Small or new managers are not necessarily rejected, but the due diligence process is often more rigorous for them. Rejeb says: “With a brand new manager, it is important to be able to trace back what the people have done in the past to establish a track record outside the new strategy.”
But this does not mean larger managers automatically have an advantage over small ones. In fact, reaching a large size can be detrimental. This is partly because a big pot of assets can affect the agility of the manager and stop the implementation of best ideas, and partly because it often causes a sense of complacency, where the manager is not challenged to attract new business.
The biggest red flags are if the team has just been changed or key people have resigned in the past three months, so the track record is no longer representative of the strategy going forward.
Other red flags would concern the investment strategy itself. If the reality does not match the manager’s description of the product – it will not sell. When analysing the investment process, the firm looks at its structure, assesses the strengths and weaknesses, reviews portfolio construction and considers implementation details. It also looks closely at how risk is managed.
Rejeb says it is important that there is an independent risk monitoring role at the firm. “We stay away from strategies that do not offer the transparency we require,” he says. This means Corestone does not invest in a large proportion of hedge fund strategies, because they do not offer the transparency needed to build an opinion on the manager.