In this issue:
- Hedge funds hunt for talent
- Another day another scandal
- Three keys to hedge fund performance
Chief investment officers and hedge fund managers have reasons for hiring and reasons for moving, and I am regularly asked for help with both situations. If there is a fund looking for talent, or an investment professional looking for a change, we are happy to post your news, or to help you with referrals.
Chief Investment Officer Opening:
A major community foundation, the $3.1 billion California Endowment in Los Angeles, is searching for a chief investment officer. René Goupillaud, the former CIO, left about six months ago and Jesse Casso, a board member and managing partner of private equity firm Casmar Capital Partners, has been running the investment process on an interim basis.
Here is the link to the position description: http://www.calendow.org/Article.aspx?id=4246 Hedge
Funds Hunt For Talent:
Sandalwood Securities made Mihir Meswani an offer he couldn’t refuse.
Sandalwood, a $1 billion credit fund of funds, has hired Meswanit away from the Robert Wood Johnson Foundation, where he had run their hedge fund, traditional equity and fixed income portfolios. The Johnson Foundation controls $8 billion, but even the biggest nonprofits have trouble holding talent when a hedge fund really wants someone and shows up waving show-biz money.
Lessons Learned from the Wesleyan Endowment Affair:
In previous issues we prominently mentioned the strangely quiet departure of Wesleyan University’s endowment CIO Thomas Kannam back in October for reasons that no one involved was quite willing to discuss. It appears now that the “other interests” he supposedly left to pursue are mainly going to involve defending himself in court.
Vigilant student reporters at the campus newspaper, and Gillian Wee at Bloomberg News, have revealed that Wesleyan, with a current endowment of approximately $520 million, is suing Mr. Kannam for a host of transgressions including fraud and breach of fiduciary duties. The allegations include a too-cozy relationship with a hedge fund and padding of his personal expenses. In fact, the whole affair is so juicy that it has attracted the official attention of the state’s Attorney-General. That would be Richard Blumenthal who, coincidentally, is hoping to become Connecticut’s next U.S. Senator this fall.
When I discussed the matter with one veteran university CIO, he pointed out that endowments often don’t have sufficiently detailed policies or written employment contracts covering these matters. And he noted that too-rapid turnover of investment committee members can cause additional conflict and disagreement about how potential conflicts-of-interest should be treated.
Pension funds and endowments usually have a written investment policy covering strategy and asset allocation. But there should also be a separate operating policy specifically including such issues as disclosure rules, fiduciary responsibility, conflict of interest, and expense reimbursement.
Written policies don’t enforce themselves, of course, and they are no substitute for management oversight. The Wesleyan situation should be a wake-up call for any institution which may have skimped in this area.
Three Keys to Better Hedge Fund Performance:
For all money managers, consistency is hard. A few geniuses like Warren Buffet maintain their touch over years and decades, but most don’t. Some of the impediments are well known and widely discussed: Investment is notoriously hard to scale, with big pots much harder to manage than small ones. And, brilliant, original strategies lose their potency when they are widely copycatted. Or, we find that a strategy works in one season, in one kind of market, but not in another.
But there are other problems less often mentioned, that have more to do with the art of management than with the art of investing. Here are three of them:
First: Lack of management experience.
A hedge fund isn’t just a strategy; it’s also a small business, and it has to be managed. Most are run by very bright, very competitive, often very wealthy individuals with little to no management experience. On top of that, many come from academia and technical areas where social skills weren’t a high priority. But as companies grow, they all need management experience in leadership, mentoring, and execution. Some owner/founders learn to recognize their limitations and bring in people with management skills to complement their own trading-and-strategizing smarts. In the long run, they win; and the others don’t.
Second: Not-invented-here syndrome.
Nobody invents the wheel more than once or twice in their lifetime, so most good new ideas will come from outside a company’s four walls. There are only two transmission belts: people can re-tool old approaches and learn new ones — which is hard. Or, firms can regularly interview new blood and bring in as many new hires as they can absorb, bringing new approaches and fresh ideas with them — which is less hard.
Third: Sclerosis in the firm’s strategy and structure.
The Greek philosopher Heraclitus argued that change is the only reality. “No man ever steps in the same river twice, for it’s not the same river and he’s not the same man.” Organizations should critically review their strategies and operations on a regular basis, whether it’s “needed” or not. How is the money really being made? What are the drivers? Are there too many people in the firm, or involved in the decision process? Too few? The wrong ones?
A once-in-a-generation downturn like the one we’ve just seen is also the best chance investment firms will have for years to hire incredible talent at credible prices. Recognizing this is a critical step in sustaining performance.
Better Process, Better Performance:
Elena Ambrosiadou, founder and long-time CEO of London based IKOS, a quant fund managing $1.4 billion, gave a video interview to Opalesque Online that’s worth ten minutes of your time. She comes from a technical, “non-people” background of the kind I referenced above but, in a very interesting way, she’s turned that experience into an effective management philosophy. In the chemical industry she ran production processes; now she applies that same kind of continuous process refinement, to running a multi-strategy hedge fund and turns it into a competitive edge. It’s one way to accomplish the constant adaptation to change that a Heraclitean world requires.
The link is here: http://www.opalesque.tv/videos/Elena_Ambrosiadou
One-Stop Shops: Start your Engines:
Carolyn McLaurin, head of SEI’s endowment and foundation practice, mentioned to me the other day that she is seeing a sharp increase in requests for “total outsourcing” proposals from the pension and investment community.
She said: “The RFPs used to ask for consulting help on a specific piece of the portfolio, but it was clear that the foundation would run the overall strategy. Now, the RFPs are often specifically asking for a turnkey solution, with investment discretion in the hands of SEI.” They are especially seeing more such inquiries from nonprofit health systems.
Two camps are emerging. The big endowments and pension funds are bringing more investment management in-house to maintain control after the shocks of last year, while smaller colleges, foundations, and pension funds are finding the investment work overwhelming and are looking for a total solution.
What We Say Versus What We Do:
Peter Lynch, the legendary chief of Fidelity’s Magellan Fund in its glory days, used to make a lot of media appearances. He once said that when he reviewed what he had said on some talk show, he was often amazed to see that his carefully articulated public views would not have led to his actual investment moves. He concluded that investment professionals make money because of their discipline and experience, and often rationalize what they’ve done after the fact.
I was reminded of this while reading a report from the Citigroup global markets group. Their January polling data suggests that investors are oscillating between investment caution and an optimistic view of the future. As the Citi survey notes, ” with an approximately 10% total return for stocks being anticipated, it is unclear why the average cash position has climbed as a percent of the portfolio from the October readings.” As with Mr. Lynch, the public pronouncements investors are making don’t seem to square with how they’re actually investing.
But, it does tell me that for money managers — including hedge funds — with a good strategy and story, there is still a lot of cash waiting out there. How does that old Gershwin tune go? “Nice work if you can get it, and you can get it if you try.”
The survey also points out that Asian Emerging Markets sentiments seems to be holding up nicely and we intend to focus in future newsletters on India and China, since they offer such fascinatingly contrasting views of governments and economic systems, two very different ” roads to riches” stories.
Charles A. Skorina & Company
Executive Search Consulting
JPMorganChase – Credit and risk management
Ernst & Young – Systems and process consulting
US Army – Russian Linguist, Japan
University of Chicago, MBA, Finance
Michigan State University and MIIS/Middlebury College