Translations of a Due Diligence Meeting for a Hedge Fund

A well prepared due diligence meeting has a subtext. The following translations will help hedge fund managers understand from where their interrogators (and potential investors) are coming.

Do you have any plans to add any employees? (Do you plan to re-model your house in the near future or are you going to back the growth of your own business?)

How concentrated is the list of your current investors? (We know if GAM pull you are you f****d)

 

I see you use an external compliance consultant. (I see you think that a small retainer to former FSA staffer can replace a core internal activity of an asset management business)

Is there a particular reason for the risk manager to be located in the annex? (We have spotted how frivolously you treat risk management that is not in your head)

Can you talk me through how you coped with October and November 2008? (What wholesale changes have you made to your risk controls to make sure that disaster zone of a return doesn’t happen again?)

Can I talk to your head of operations about that? (You clearly know nothing about what the back office does)

What was the background for your former partner to leave last year? (Who had the biggest ego between the two founders?)

Who bought the pictures in this meeting room? (Whose taste is THIS?)

These are nice offices and a great location. (This is a big overhead for a small business)

What a friendly dog!  (Having the principal’s name over the door was not just the default choice)

What is your experience of using this system for operations? (I’ve never heard of this supplier)

Can I deal with you directly from here on? (This third part marketer is a piece-of-work)

What are Hedge Fund Managers made of?

What are HEDGE FUND MANAGERS made of?

     40% Work Rate
     15% Ambition
     15% Talent
     12% Hubris
     10% Entrepreneurialism
       8% Reactiveness



What are FUNDS OF HEDGE FUND MANAGERS made of?

     35% Process
     20% Marketing
     20% Database and library
     15% Understanding
       5% Structure
       3% Risk measurement
       2% Promises


Add your own version and responses using the comments function below.

Mark Anson’s Top Ten Hedge Fund Quotes

Mark Anson is unusual in having held the top job in a major institutional investor on both sides of the Atlantic. He was Chief Executive Officer of Hermes Pensions Management Ltd., where he was also the Chief Executive Officer of the British Telecom Pension Scheme, the largest pension fund in the United Kingdom.  Prior to joining Hermes, He served as the Chief Investment Officer of the California Public Employees' Retirement System, the largest pension fund in the United States. More recently he joined Oak Hill Investment Management, the firm which grew out of Robert Bass's family office, as a Managing Partner and Chair of the Investment Committee.

Over the course of his career he has listened attentively to many pitches by hedge fund managers, and his notes enabled him to compile in 2007 his "Top Ten Quotations from Hedge Fund Managers" which appeared in print this year*. Enjoy.


10. "If we don't charge 2 and 20, no one will take us seriously."

9. "We are 75% cash because we cannot find sufficient investments."

8. "We charge 3 and 30 because that is the only way we can keep our assets under several billion."

7. "We don't invest in crowded shorts."

6. "I haven't shorted before, but I do have my CFA."

5. "Managed Futures are a better investment than Hedge Funds because Hedge Funds are a zero sum game."

4. "What's a Master Trust?"

3. "Your Head of Equity doesn't understand our Hedge Fund strategy."

2. "Basically, I look at the trading screens all day and go with my gut."

1. "He will be with you in a minute sir, he's still meeting with his architect."



*Top Hedge Fund Investors: Stories, Strategies, and Advice (Wiley Finance)

Heightened Uncertainty

All those who engage with markets always have to cope with uncertainty, and so it helps to have an over-arching investment thesis to put everything in context. I have particularly heightened uncertainty to cope with today as I don't know what I'm getting for Christmas. In that spirit I offer you some help with some appropriate research from http://longorshortcapital.com. "The Perfect Storm of Investment Theses" dates from 2008, but a good piece of research has some shelf life. Have a good Christmas - Simon Kerr


We are currently in the Perfect Storm of Perfect Storms. This has caused great loss in our imaginary investment portfolio on the gains we had generated by shorting mortgage-backed securities. The only way to counter a Perfect Storm of Perfect Storms is with the Perfect Storm of Investment Theses. Luckily, we have found it: The Four S's.

We have identified four trends that all start with S. They are also all compelling investment opportunities. Combined, they form the Perfect Storm Investment Thesis.

• Solar power
• Smartphones
• Software…
• …as a Service

Many people correctly believe that:

• In the future, solar power will be the primary source of energy for the world economy. This power will be free, plentiful, and have no environmental impact. Except the unknown impact that results from taking massive amounts of energy that normally would have hit the Earth and shunting it into our cars and smartphones, and the related waste from producing solar paneling on an industrial scale, but other than that, we can assure there will be no environmental impact. As a side benefit, Al Gore will finally shut his piehole, since he will have made his billions from his green portfolio, you know, the book he talks everytime he opens his mouth.
• Smartphones will achieve 207% penetration as most consumers choose to carry more than one smartphone in order to make themselves smarter. Smart people know that it is important to have a persistent buffer from the place you are actually in. That is to say, if I’m driving, I’d be better off talking to Sarah. If I’m on a date with Sarah, I’d probably be better off talking on the phone with Sonya. And if I’m at Sonya’s apartment watching Mad Men in the nude, I’d be better off playing the newest cool iPhone game. Smart people know this is the whole point of smartphones. Apple will have 35% share, RIMM will have 30% share, Palm will have 25% share, and Nokia will continue to be the market share leader with 40% (See, they’re all winners!)
• No one will use antiquated sales programs like Siebel. Everyone will use online, automated sales programs like Salesforce.com and Google Adwords. All sales will take place online. Brick & Mortar stores will be converted en masse into sales kiosk repositories and/or expensive condominiums communities where everyone feels like they know everyone else but in reality are too busy doing something with their smartphone to know anything about the people who breathe the same air as they do.

However, using our superior intellects, we realize all of this will converge. In the future, software as a service tools will be the exclusive sales channel for solar-powered smartphones. We expect they will be able to run all the most important applications including Call of Duty 8, Microsoft Excel, and YouTube. Additionally, by 2012 they will achieve grid parity pricing and begin contributing energy back to the grid. We calculate the total market size for this trend at $8 trillion.
Recommendation: Software as a Service Solar Smartphones will stave off the Perfect Storm of Perfect Storms.

A HF Joke - Allocators of Capital and Marketers

A group of hedge fund allocators and feeder fund marketers are all travelling by train to Lausanne for the same conference. The allocators of capital make a big deal out of making sure they each have their tickets, but the marketers report that they just had one of their number buy a ticket, and the rest would do without, which the allocators of course thought was just braggadocio. Before long, the conductor comes down the aisle, collecting tickets, and all the marketers of feeder funds get up and crowd into the toilet. After the conductor collects all the rest of the passengers' tickets, he knocks on the WC door, demanding, "Ticket!" The marketers slip their one ticket out the door, which the conductor takes and stamps and hands back before going on his way.

One the return trip, the allocators of capital to hedge funds are all a-grin, and they proclaim that they've just got one ticket between the lot of them. But now the marketers say they haven't any tickets at all. The allocators mumble amongst themselves words to the effect of, "Marketers, what are they like!" Then the conductor starts down the aisle, and all of the allocators crowd into the toilet. And one of the feeder fund marketers goes the the WC door, knocks, and demands, "Ticket!"