Q&A with Cédric Dingens, a Chartered Alternative Investment Analyst, who oversees risk management and quantitative analysis at Notz Stucki and is also a member of the Portfolio Management & Hedge Fund Selection team.
Q: Notz Stucki is recognised as a pioneer in alternative investment. What accounts for the firm’s longevity… where so many other firms have failed?
A: There are two major reasons for the longevity and success of Notz Stucki in alternative investment over the past 52 years. Notably, most of our investors have a long-term perspective. Many of our fund of funds investors, for example, have been associated with the firm since the 1970s or 1980s, so they have a very clear understanding of how those funds perform. So in 2008, when all worldwide markets were in turmoil, most of those investors stayed with us during that difficult period. Some investors did leave, but many of those came back when the markets settled down.
Another key factor in our firm’s longevity is investor balance. We have a large number of High Net Worth Individual investors, but we also have a great number of institutional investors. Individuals and institutions often have very different investment needs, goals, risk tolerances and time horizons. So this diversity in our client base has provided an inherent equilibrium that maintains fund stability.
Whether they are individuals or institutions, Notz Stucki’s success has also been based on maintaining open and honest communication with its investors, in both good and difficult market environments.
Q: What are some of your key considerations in selection of fund managers?
A: The first question we ask is, “What is this manager’s “edge” or “alpha?” We are always looking for new talent, on a world wide basis, across all asset classes. Performance is naturally a key consideration in manager selection, but before we look at performance, we first need to understand at the outset what the fund manager is doing and why.
Apart from purpose and performance factors, long-term relationships are very important to us in manager selection. For example, if an analyst we know and trust, who is associated with a respected fund, wants to start his own fund, we may become an investor from the outset, because we know their story and have confidence in them. So our current perceptions of a manager’s quality over a long period of time are important.
This does not mean we limit our selection only to those funds we know personally. We often become aware of new funds indirectly through organizations and people we know and respect in the US, Europe and Asia. Those referrals and recommendations can also be important factors for initial selection, and can come to us through friendly competitors and even through our investors.
We also conduct independent research on an ongoing basis. We often look for funds that are neither too large or too small, in a sweet spot between $300 and $800 million US. But regardless of how a fund makes it onto our radar screen, we always apply the same level of rigorous analysis before we make our selections. Having a relationship with us does not guarantee selection for any fund.
Q: Given your strong credentials in compliance and risk management, do you have any guidance for funds on that topic?
A: There has been significant improvement in the industry’s compliance standards
over the past decade. It’s a very different environment now, where the transparency standards for hedge funds is extremely high. The quality and consistency of compliance and risk management professionals are really incredible. And those standards have become consistent across the globe.
When we perform due diligence on managers, if they don’t meet the industry’s highest standards, we exclude them from consideration immediately. So my guidance for funds with respect to compliance is very simple: hire qualified people and follow best practices. That way, you will avoid becoming a target for enforcement, and you will qualify for our consideration. This is an area where we make no compromises or exceptions.
Q: What are some of the best or worst practices you’ve seen in how fund managers market themselves?
A: One of the most common marketing shortcomings involves the manner in which funds present their performance to us. For example, a manager might present a “pro forma” track record, which provides us with absolutely no legitimate basis on which to understand, validate or evaluate their performance.
Or a fund manager might present returns gross of fees, mix different track records, or present their numbers in a manner that’s not straightforward or traditional. This is an immediate red flag for us.
Some managers will rely heavily on name dropping, or use their professional experience, or prior relationships with other funds to establish credibility and to generate our interest. But this tactic can be viewed as a smokescreen if it’s overdone. In our due diligence process, we always check references, and we are very diligent about validating any claims that a fund manager makes. We expect fund managers to be truthful about everything.
The level of marketing discipline that a fund applies can vary widely, depending on their circumstances. For some funds, it’s important to have a robust website and to conduct an extensive investor relations programs. For other funds, keeping a low profile is more appropriate. In fact, many of the best managers do not promote themselves at all, and rely solely on their reputation, track record and referrals.
But regardless of a fund’s marketing strategy, over-promotion is never a good sign for us. In some cases, the more that a fund markets itself, the less attractive they are to us.
Q: How can small and/or unknown funds make it onto your radar screen?
A: There is no simple or easy way for small and unknown funds to gain our attention. I personally receive more than 300 emails and dozens of phone calls every day, and gaining my attention is extremely difficult.
Fund managers need to be smart and efficient about how to communicate with investors and allocators. This begins with gaining an understanding of the types of funds I am likely to be looking for. In addition to gauging whether I am an appropriate prospect, market timing is a critical factor. When they approach us, funds need to explain right up front how and why we can benefit from their approach at that specific period of time. And they should not come back to us every two months with the same pitch, regardless of market conditions.
If a fund is appropriate for us, they need to strike the right balance with respect to their frequency of communication, and the volume of information they send. Providing a bi-monthly or quarterly update can be helpful; but sending something bi-weekly or even monthly can be viewed as bothersome. And fund updates need to be brief and interesting. Fund managers that overload investors with detailed information are not showing respect for their time, and demonstrate a lack of sophistication that does not reflect well on their fund.
Q: What are the values that drive your thinking and decisions in your business position and personal life?
A: Loyalty, consistency and long-term relationships are very important to me. Whether it’s in my personal or professional life, I respect and enjoy associating with people who are straightforward, and tell you clearly what they are thinking and feeling. These are people, for example, you may have met 20 years ago, but with whom you still enjoy having a conversation, and hearing their opinions.
Most often, I respond to people and decision-making based on objective reasoning rather than emotion. In practical terms, for example, this means being able to deliver bad news when it’s appropriate. It also can involve admitting mistakes when they are made, and in all cases explaining why things did or didn’t happen. In my view, this is what builds the credibility and trust that are necessary in all aspects of one’s life.
I’m an engineer by training, so I naturally view the world from a quantitative, Cartesian perspective. But at the end of the day, every business, including asset management, is a people business. You can’t always explain market behaviour through mathematical formulas. So success in the world of investment is often based on a combination of Cartesian logic and establishing good relationships with people.
At the outset of my professional career, as a portfolio analyst, I was involved in the creation of complex, quantitative risk management models. I found beauty and comfort in mathematical, orderly solutions. But when I applied those models against return strategies of actual managers, I quickly realised that real-world “human factors” always trump theoretical formulas.
So in my work, meeting face-to-face with fund managers is one of my most important responsibilities; to determine how closely their models match their behaviour and portfolios. In fact, it’s this mixture of quant with human that’s of greatest interest to me. Sometimes, I’ll meet a brilliant manager who, for some reason, is unable to deliver on his potential. Or conversely, I’ll discover a manager who is unimpressive on the surface, but whose returns are consistently impressive.
So over time, my ability to determine whether a manager will likely perform as they claim is based less on my quantitative skills, and more on the cumulative experience I’ve gained from interviewing hundreds of fund managers. My success in fund manager selection is often based on a combination of mathematical rigour and gut instinct.
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