Strategic Risk Management: A Practical Guide to Portfolio Risk Management

CHAPTER 14

Manager Selection

Hiring and firing investment managers is an important task facing many funds. This is because investment managers are entrusted with managing the assets of a fund and delivering on its investment objectives. The process of manager selection requires good research, constant manager monitoring, and an appropriate governance structure so the fund can respond appropriately and hastily when required. These manager selection tasks require a significant commitment of resources and time to undertake effectively. In this chapter, we outline the key to good processes that will aid in making effective manager hiring and firing decisions.

HIRING MANAGERS

Manager selection is not always an easy task. Even the best manager selection processes and manager evaluations can result in poor outcomes. Luck plays a role in the outcome. This does not mean that selecting managers by throwing darts at a list of manager names is the answer. Rather, a disciplined approach to manager evaluation and selection will have a better chance of producing superior outcomes over time. Increasing the chances of hiring and keeping good managers requires three things:

1. An asset class structure

2. Collecting information

3. Evaluating managers

Asset Class Structure

Having a predefined asset class structure is necessary before manager selection can be undertaken. Asset class structures assist with manager selection in these ways:

• They refine the manager search universe. If a small-cap manager ...