What Investors Want: Ten
What do asset allocators look for when they approach a
manager? We asked Mark Shore, who has experience both in due diligence and
managed futures. He was vice president and chief operating officer
at Morgan Stanley's VK Capital Inc., a commodity trading
advisor. More recently he was head of risk at Octane
Research Inc., where he did due diligence on funds of hedge funds.
Currently he is chief investment officer at Shore
Capital Management, where he provides research and consulting on alternative
investments with a focus on CTAs. He is also teaching a course on managed
futures at DePaul University.
Mr. Shore says managers should:
- Be open to providing information.
It is not helpful to tell people who are doing due
diligence, "You don't need to know this, it does not matter," even if the
request for information is about a minor issue.
- Understand the markets they trade in.
The experience can be longer or shorter, at different
places or just one place. But there has to be a demonstrable appreciation of how
the markets work.
- Explain what caused the drawdowns.
Everybody has drawdowns, but they should learn from the
experience and help us understand what caused it. "It was bad luck" is not a
good explanation. There is always an element of luck but managers have to be
aware of what makes their investment program vulnerable.
- Have a well organized research process, undertaken by
confidence-inspiring people. The manager needs to discuss how they do the
research and what kind of process they have in place.
- Generate the type of volatility that diversifies the
Like cholesterol, there is good and bad volatility. Good
volatility fits the portfolio. I don't like using the Sharpe ratio to assess
performance because it makes no distinction between the good and the bad- this
is due to the assumption of a normal distribution.
- Take care of business issues.
If the manager's time is taken up by investment and
trading-related work, then there should be other senior people at the firm who
have the ability to run the business.
- Create an organizational structure that covers necessary
It should be clear that all functions are taken care of.
- Make sure the back office is staffed with capable
The back office can be internal or outsourced to a third
party, like a large prime broker or administrator, as long as they have the
- Have a reasonably stable investor base.
There should be long-term clients and not a lot of turnover
in the investor base over the history of the fund.
- Be prepared for key personnel risk.
There needs to be qualified people at the firm who can take
over if something happens to the managing partner.