Hedge Fund Due Diligence
Most Hedge Fund scandals would be avoided with proper due diligence performed by experienced managers.
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to come. Sujects include double taxation of bonds and corporate governance.
April 19, 2012: Death of a great investment counselor, Carl H. Otto
Updated: April 20, 2012
Due Diligence case: Improper portfolio construction neutralizing a manager’s alpha!
I visited a Quant firm in California. The firm used a proprietary forecasting model and its own risk model in portfolio construction. Its alpha model bet on a series of fundamental and technical signals. They used their own statistical risk model in controlling risk. In order to get market neutrality, they neutralized ALL common factor bets – not realizing that in doing so, they were neutralizing some of their fundamental and technical alpha signals that happened to be correlated to their top 20 statistical risk factors retained in their statistical risk factor model! As the president of one leading risk firm said: “…using complex mathematical processes does not make you a real Quant…”
For more information on optimal construction which seeks to maximize exposure to a manager's views while neutralizing all other factors for which a manager has no view, please contact us.
Dominic Clermont, ASA, MBA, CFA
