Managing Hedge Fund Managers: Quantitative and Qualitative Performance Measures

CHAPTER 10

Monitoring Your Flock I Walk in the Valley of Darkness, I Fear No Evil

 

 

Diligentia maximum etiam mediocris ingeni subsidium. (Diligence is a very great help even to a mediocre intelligence.)

—Seneca

 

 

Investors have spent several months combing through paperwork and data to find a comfort level in choosing a particular hedge fund or group of hedge funds. Many are relieved that the arduous process is over. Unfortunately for the true investor, one phase is over and a new one begins: monitoring of the chosen funds. In the prior months, there was little at stake besides time. Now with capital invested, our process and conclusions are being tested.

The due diligence process takes on a slightly different tone for several reasons. Most obvious for you and the hedge fund is that you are now an interested party. You are rooting for the manager to succeed, and the manager wants the investment to be successful in the hope you will invest more money or possibly tell your friends. After all, “country club marketing” is still one of the most successful distribution channels in the investment business. An investor should approach the ongoing duty of care in a similarly systematic way as he approached the original work. The views may be a bit different; however, the end result, a feeling of comfort with the fund and the manager, is still the end result.

The factors to be reviewed will be similar but the data reviewed will be looked at in view of the changing market and economic environments ...