SELECTION OF INVESTMENT MANAGERS
The reputation and credibility of our firm is dependent on being highly selective of the firms we represent. As a result we represent less than three percent of managers we do due diligence on. We use an institutional process in selecting managers including the following steps:
1. Maintaining a reputation as a leader in third party marketing firm industry
In a highly competitive marketplace, this helps to differentiate Agecroft from peers and improves the probability that the highest quality hedge funds and private equity funds looking for marketing support will choose our firm. It also affords us access to institutional quality investors who trust our reputation and process and see us as an additional screen for their process.
2. Sourcing managers
In evaluating fund managers we begin by first casting as wide a net as possible and then pursuing four key areas to build a proprietary universe of thousands of managers with the ultimate goal to narrow that number to approximately half a dozen managers to represent. These 4 areas include:
a. Direct contact by hedge fund and private equity managers
Because of our strong brand in the market place we have a constant flow of fund managers contacting us to represent them. We don’t take this lightly, we try to get back with each one and provide constructive criticism even if they are not a short-term fit.
We have developed strong relationships with many institutional investors, prime brokers and other service providers who use similar criteria to evaluate fund managers. These relationships are a valuable resource in identifying high quality managers for us on a regular basis.
We review many of the leading industry publications and attend industry conferences with a look out for high quality managers.
d. Industry databases
The alternative investment market place is inefficient due to the lack of reliable information on managers. All databases are missing a significant number of funds. As a result we continually review multiple databases for potential managers and discuss candidates internally to determine if further due diligence is warranted.
3. Quantitative screening of managers
We use quantitative screens to narrow the universe of managers in order to prioritize further research efforts. Some of the factors we typically focus on include:
a. Assets under management of at least $75 million in strategy.
b. Performance that ranks near the top of their strategy peer group.
c. High sharpe and sortino ratios compared to their peer group.
d. Low historical performance drawdowns compared to their peer group.
e. Correlations to a major market index given their investment strategy.
f. Performance characterized by quantifiable alpha and its repetitiveness.
4. Qualitative screening of managers
We analyze each firm based on multiple variables which include:
a. Top down analysis
Is it a strategy we believe will do well going forward given the current economic environment? We do not chase performance.
b. Quality of firm
A review of the organization with an eye toward appropriate staffing, infrastructure, reputation and commitment to reinvestment in the firm necessary to support growth.
c. Quality of investment team
Pedigree, industry knowledge, experience, reputations, and the continuity of key investment staff.
d. Review of investment philosophy and process
We must understand what inefficiencies in the market place they are focused on and what their edge is in taking advantage of these inefficiencies.
e. Risk controls
This includes understanding their exposure to current and potential risks in their portfolio in addition to maximum limits on leverage, liquidity and concentration as well as quantitative risk controls.
f. Service providers and fund terms
5. Meeting with portfolio manager
Once a manager has made it through our quantitative and qualitative screening process a senior member of the firm is assigned to meet with the portfolio manager and other senior people within the alternative investment organization. Often this part of the process requires multiple meetings.
6. All senior members of team speak with portfolio manager
This could either be structured as a conference call or on-site meeting. After the meeting/conference call any senior members of our team have the ability to veto a manager and all members communicate their assessment of the manager. The output from this meeting is used to create a manager quality score from 1 to 9 which is then included in a proprietary fund ranking system. Those managers who rank near the top are then engaged in contract discussions.
7. Market feedback/Operational due diligence
We contact all service providers to confirm the organization is a client in good standing and has no outstanding issues.
8. Continual re-evaluation of manager
Once a manager is brought on to our platform we receive constant feedback from the thousands of investors we reach out to on a monthly basis. This feedback is communicated to the managers to help improve their offering. In addition, we are constantly reviewing this information for any signal there could be potential issues with a manager.
Investors should perform their own independent due diligence on a hedge fund or private equity fund before investing.