Paper: Hedge Fund Selection - Have you been doing it wrong all these years?
For many Hedge Fund investors, finding the optimal portfolio weights across different Hedge Fund strategies seems to be their priority when constructing their allocation. Like, what is the optimal weight for Equity Hedge vs Macro vs Event Driven vs Relative Value?
In turn, manager selection comes second in terms of research focus and resource allocation. In a world of limited resources, is this the optimal approach? Is the added value of being skilled at strategy selection more important than the ability to systematically find the top managers? Investors often feel they are stuck between a rock and a hard place.
The purpose of this article is to quantify the performance benefit of being skilled at strategy selection versus being skilled at manager selection and to determine which of the two an investor should focus on.
As manager dispersion (the difference in returns between top and bottom quartile hedge funds) can triple in financial crisis years and market stress, it will be helpful for all hedge fund investors to understand the implications of the "strategy versus manager selection" question, both from a performance and optimal resource allocation perspective.
Learn more about:
- Given that there are 10,000 managers to chose from, is it worth spending a great deal of your resources on trying to find the very best managers versus an average manager?
- Why is the dispersion of returns between top and bottom quartile hedge funds almost doubling in crisis years?
- How does the dispersion of hedge fund manager returns compare to long-only fixed income or equity fund managers?
- What is the best method to weigh hedge fund strategies?
Author: Cedric Kohler, Head of Advisory, Fundana
Fundana was founded 27 years ago to advise one of the largest Swiss banks on their Hedge Fund allocation. Fundana is regulated by FINMA and based in Geneva with 15 professionals and manages about $1Bn of Assets. The firm is recognized by industry peers as a specialist; clients include Family Offices, Independent Asset Managers, Pension Funds and Banks as well as Fundana's employees and partners.
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