Hedge Fund Due Diligence

What you say you do is not what you do!

I was visiting a NY quant manager working for one of the largest global investment organization. The person is well known and has published numerous quality articles in professional journals. The performance of the strategy was good without being extraordinary. He described his strategy and I asked a lot of detailed questions about the investment process. I realized that the way he was managing the strategy was different from the backtest that I was shown. When I asked why he was not adding the same portfolio construction constraints to his backtest, he started arguing that these constraints were imposed by the risk department and were reducing the alpha of the strategy. I sensed that this had been in hot discussions with the risk department and that I was not supposed to hear those arguments. But as a potential client, I want to see backtests that are as close as possible to the real thing. And if your employer force you to do things that are not in the best interest of the client’s portfolio, then you should leave that employer. I did not invest in that strategy…

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Dominic Clermont, ASA, MBA, CFA

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