Non-investment Issues In Manager Evaluation - A Brief Overview

Non- Investment Issues in Manager Evaluation: a Brief Overview

Mikhail Munenzon, CFA, CAIA

[email protected]

Mikhail Munenzon CFA, CAIA [email protected]

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Benefits of evaluation of non-investment issues in manager selection Clues about a manager’s approach to

operational/organizational/regulatory/legal issues and its alignment with investment strategy and clients’ interests can reveal Potential problems in the successful implementation of a

manager’s strategy Conflict with clients’ interests

Therefore, such clues may help Minimize the risk of capital loss Maximize the likelihood of capital appreciation in a cost

effective manner Complement quantitative/qualitative analysis of a manager’s

investment strategy and track record


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Operational / Organizational Issues Manager Incentives

Management fee vs incentive compensation Ownership of management company Where is most of a manager’s net worth invested?

Complexity vs simplicity Number of vendors, service providers, counterparties, technology platforms, etc. Lines of responsibility and authority

Alignment of operations/organization with investment strategy E.g., if speed of decision making is important to success of a manager’s strategy, decisions by committee over a

number of weeks may not be appropriate Organizational structure Prime brokers

Financial condition Contract issues –e.g., where are the securities? ‘Dumb’ asset gatherer or value-added partner with analytics and other services Are assets co-mingled with primer broker’s assets?

Administrators Valuation sources

Execution platforms Access to liquidity Total execution costs Algorithms Settlement support Research

Staff gaps and turnover; staff incentives Disaster planning Scalability


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Regulatory / Legal and Other Issues Registration status Compliance with requirements applicable for a manager’s business, such as

Compliance manual tailored to the business Regular internal audits on key issues – e.g., recordkeeping, employee trading, etc. Disclosures Authority of CCO

Employee trading policies and policies on insider information Best execution

Who is the primary broker and is it affiliated with the manager? What are the total fees and why selected?

Performance measurement Pricing sources and principles, especially for illiquid instruments Cash vs accrual accounting Trade vs settlement date

Reporting How frequent? What is disclosed?

Performance Top positions Top sector exposures; domestic vs international End of period figures and/or average during the month


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Regulatory / Legal and Other Issues (cont.)

Separate account or fund Legal actions against the manager Background and financial/legal status of key

service providers E.g., accountant, attorney, prime broker

Contract issues Lockups Liquidity High watermarks Side pockets ‘Key person’ and ‘most favored client’ clauses Transparency

Non-investment Issues In Manager Evaluation - A Brief Overview

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