Hedge Fund Due Diligence

Marketing/Story telling organization vs Knowledge-based organization

I visited investment organizations which I admire: knowledge-based organizations. Everything in the organization is done with a purpose: maximizing returns for a certain risk budget. Whether it is forecasting (active) returns, managing and monitoring risk, managing and monitoring implementation, explaining performance (attribution) improving every steps of the process.

Other organizations spend little money on skilled portfolio managers, analysts, database and systems. They may have taken undue/unmonitored risk and by chance outperformed their benchmark or their peers. On the other hand, they may invest heavily in marketing/story telling - selling performance obtained by luck. After all, a highly paid good marketer pays him/herself with just a few contracts.

Remember that it is very difficult to distinguish between skilled and non-skilled managers based on performance alone (see what I wrote on Investment Skill measurement).

Knowledge-based organizations tend to do better in the long run. Marketing/story telling organizations can have luck and stick around for a while. Eventually, their lack of investment skills will be reflected in their performance.

For more information on how to build knowledge-based organizations, please contact us.

Dominic Clermont, ASA, MBA, CFA

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