Investment Monitoring
Investors need to track their investments closely but how they do it reflects their investment styles, ranging from passive to active. Passive investors focus on diversifying their portfolios with managers of unique edges without worrying too much about macro and market trends. Active investors on the other hand closely follow and incorporate their macro and market views in their allocation decisions.
Investors should not overreact to the whim of the market while not going against obvious major trends that are likely to persist. Regardless of your style, the foundation of hedge fund investing is to select managers who can consistently produce superior absolute and risk-adjusted returns.
With these caveats, here are some of the major monitoring tasks:
- Keep up to date with macro and market trends, and the outlook of various asset classes and strategies, focusing on major trends. Ensure that your holdings are aligned with major trends, without overreacting.
- Set up alerts with news feeds and search engines to monitor investees, geopolitical, macroeconomic, and market news and events. Network with investors, managers, and service providers to stay informed of any major developments that may impact your holdings of hedge funds.
- Regularly adjust allocations to follow diversification rules. Occasionally add or remove fund managers according to an established procedure. Avoid overreliance on a small number of funds.
- Maintain regular contacts with investees, and participate in investor days organized by the funds. Monitor regulatory actions, reputational or governance issues, changes in ownership or organizational structure or major procedures, or pending departures of key persons.
- Review reports from managers on monthly performance, gross and net exposure, holdings, concentration, market views, and commentaries. Check adherence to strategy, risk parameters, reporting commitments, et al. Review quarterly and annual reports carefully. Make sure nothing is out of the ordinary and there are no discrepancies.
- Regularly visit investee offices (usually quarterly and as needed), meet the principals and senior front and back office staff, listen and ask questions. Make sure what you hear and see during these visits is consistent with what you read from reports and heard on the news and through the grapevine.
- Look out for fat tail risks – situations where funds have a high downside correlation and a low upside correlation. Understand drivers of performance discrepancies during bull markets and react accordingly. In bear markets, managers may incur much larger losses than the standard deviation would suggest – stay conservative to preserve capital.
- Carry out a full review for possible termination if there are major changes in the fund managers. These changes include performance deterioration, key staff departure, negative change in ownership, and unsustainable AUM growth. Any unexpected changes in major processes, mismanagement of talent, pending problems in succession or retention, or major issues in compliance should raise red flags.