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Hedgefund Selection
Process
In A Nutshell
Goal: Performance Maximization
● Performance Maximization is achieved by selecting managers who
outperform a rising market...
The First Process:
Identifying Investment stories
● Capital Markets exist in a constant state of flux within which investo...
The Second process:
Finding managers that produce added alpha
● We look for talent - practice brings you to a certain leve...
A Typical Preferred New Manager Profile
● A team of five or more where the key Portfolio Manager had formative previous
ex...
Manager Selection Process
Sourcing IR Contact HFFP
CIO
Contact
QA HFIC
Sourcing
● Our personal networks
● Current and past hedge fund managers
● Prime Broker capital introduction events
● Third...
IR/ PM First Contact
● First contact
○ On-site at our offices, telephone conference call, or industry conference
○ Possibl...
HFFP
● Hedge Fund First Pass (HFFP) assimilates and documents
o Includes all meetings/conversations conducted by the inhou...
PM/CIO Contact
● HFFPs are reviewed by the Investment Team, discussed and critiqued
● If a Hedge Fund clears this process ...
Quantative Analysis
● Benchmark indices/ETFs are defined
● Detailed primary portfolio asset exposure and weighting data al...
Manager Selection Process
● Hedge Fund Investment Case (HFIC) is the sequel of the HFFP. It gathers together all the
stran...
Complementary Process
● Operational Due Diligence
o Backround checks
o Conducted by COO/CRO with absolute independence
o S...
What (Fo)HFs should do to earn their
place in a portfolio
● In Good Times
o Must complement not duplicate
o Must add value...
Summary
Manager selection is both an art and a science. Scientific
analysis, judgement, experience and instinct all play a...
Contact
Please check my Linkedin Profile:
ch.linkedin.com/in/stefanbecker
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Hedgefund Selection Process for Family Offices and FoHFs - In a Nutshell

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

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Hedgefund Selection Process for Family Offices and FoHFs - In a Nutshell

  1. 1. Hedgefund Selection Process In A Nutshell
  2. 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. 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. 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. 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
  6. 6. Manager Selection Process Sourcing IR Contact HFFP CIO Contact QA HFIC
  7. 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. 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. 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. 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. 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. 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. 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. 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. 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
  16. 16. Contact Please check my Linkedin Profile: ch.linkedin.com/in/stefanbecker

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