How behavioural analysis can serve as a meaningful supplement to the hedge fund due diligence process, potentially exposing key insights about hedge fund managers that might ordinarily remain hidden, is the focus of a new white paper from TeamCo Advisors.
The paper, entitled, “Behavioural Analysis: Seeing What Is Left Unsaid,” was co-authored by TeamCo Managing Director Aimee F Kish, CAIA and Leanne ten Brinke, PhD, a Banting Postdoctoral Fellow at University of California, Berkeley.
TeamCo Advisers is a privately owned investment advisory firm that manages portfolios of select hedge funds and other opportunistic alternative assets.
In collaboration with Dr ten Brinke and researchers at UC Berkeley, TeamCo has been incorporating behavioural analysis into its investment management due diligence process for the past two and a half years. By interviewing hedge fund managers and analysing the verbal and non-verbal cues revealed during those interviews, TeamCo has uncovered meaningful, additive insights into managers’ personalities, helping the firm not only recognise qualities that might make certain hedge fund managers successful and exceptional, but also identify negative traits and warning signs that could potentially lead to bad investment decisions.
The study and application of behavioural analysis has grown dramatically over the past 40 years and has been leveraged across a range of disciplines and fields in order to improve interview techniques.
TeamCo believes that the evaluation of the key people at a hedge fund is vitally important when considering an investment, and accordingly, the assessment of managers’ personal attributes should be incorporated in any hedge fund due diligence program, paired with rigorous quantitative analysis.
The careful, skilled analysis of non-verbal behaviours and cues can reveal important insights about a manager’s personality, including positive qualities such as tenacity or intellect, as well as “red-flags” such as deception, aggression, or callousness, which could denote potential risk to investment. A trained understanding of these personality traits can both help inform allocators’ understanding of a hedge fund’s key people and predict how a hedge fund manager may react when faced with certain obstacles in the future.
For example, as a result of identifying deception and other negative personality traits, an allocator would be able to more skillfully probe sensitive topics during interviews, identify areas where more due diligence is needed, and provide crucial warning signals to investors trying to avoid possible hedge fund blow ups, regulatory backlash, and headline risk.
TeamCo believes that evaluating a hedge fund’s key people — according to a rubric of psychologically meaningful behavioural criteria — is often the most important form of risk mitigation when considering a hedge fund for a potential investment.
Kish says: “The top people at a hedge fund regularly dictate the firm’s success or failure – they control investment decisions, run the day-to-day operations, and set the firm’s culture. By incorporating a sophisticated analysis of verbal and non-verbal cues into our due diligence process, TeamCo has been able to critically evaluate these key people, and, even in brief interactions, determine whether they have the positive traits that could potentially make them ‘all-stars’ or the negative attributes and suspicious body language that could be signals of trouble down the road. This analysis has enabled us to glean important, additive insights about managers’ personalities and dispositions, giving us a deeper understanding of the people ultimately responsible for investors’ capital.”