To be perfectly honest, I’m not sure any professional Fund of Fund managers anywhere would admit using any of the techniques below, much less advocating their use. That said, in my experience, these techniques are both popular and bone-stupid.
Hiring People with Charisma
Charisma doesn’t count. It’s not evidence.
Hiring People without doing all of your Homework
Many FOF managers do only part of their job and fight any suggestion that there is anything else in the world that might be of some importance. Naturally, this problem is not limited to FOF managers. Consider, as an example, that in 2008 the various bond-rating services rated collateralized mortgage obligation without looking at individual mortgages.
Hiring people from your affinity group
An affinity group is any group its members consider important. The question is not whether someone is a member of your group. The question is whether or not that person can do his job.
Hiring People with Looks
Hiring Extremely Tall People
Hiring People who have Great Offices
Hiring People with Your Values
An investment manager’s values typically may have many implications, some of which may be positive while others are negative. Worse yet, an investment manager’s values need not always have the implications FOF managers presume.
What Should You Do?
Make sure the investment manager can trade profitably. Confirm the validation procedures. Confirm the audit. Make sure the Investment Manager’s method’s makes sense. Check everything you can. And worry. A lot.
From Trust is Not an Option: The Practical Paranoid’s Guide to Evaluating and Selecting Investment Managers by Fred Gehm, Copyright 2013 Fred Gehm. All rights reserved. fredgehm@tds.net. (847) 236-0146.
