How to avoid "strategy drift"

Common emerging manager issues and their resolutions - Part 3

It is imperative that investors have evidence of continual program development and improvement. A manager’s ongoing research process, hiring procedures, deployment approach (etc.), are all critical in ascertaining a strong track record’s reliance on luck or skill. What the investor is looking for is approach improvements that leverage a managers’ unique value proposition to greater affect. If an investor selects a manager that rests on their laurels, they rely on luck for long-term viability. However, inasmuch as the sophisticated allocator succeeds in isolating skill, they can anticipate a greater likelihood of ongoing strategy success.

How to discuss strategy improvement.

The reality is that some strategies (though not all) that once were tremendous alpha generators may simply not work again. There are many potential causes including: liquidity changes, regulatory advancements and new market entrants. Identifying whether a decline in performance is a function of the temporary or permanent is difficult. No one is in a better position to identify the poor performance culprit than managers themselves. If a manager believes their strategy has been victimized, they should return assets to investors. Later, with thought, research and innovation, managers can then re-approach investors with a new offering. Trying to adjust on the fly and tailoring your message accordingly is unacceptable and irreprehensible.

If, however, as should be the case on a relative frequent basis, you have cause to discuss a strategy improvement with investors and prospects, here are thoughts to consider. First, express your advancement as a function of how it extends your core expertise. Second, explain how your innovation fits and betters the overall portfolio. Third, discuss the intuitive justification for why your strategy works relative to a defensible view of the market inefficiencies you aim to exploit.

Investors want to believe they have committed their capital to the very best risk-conscious innovators the alternative investment community has available.  It is the manager’s responsibility to justify an investor’s conviction on an ongoing basis.

 

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About the Author
Grant Jaffarian

Grant Jaffarian is the CEO and founder of AlphaTerra, LLC, which helps identify top emerging manager talent for sophisticated investors as well as prepares managers for institutional money management. Prior to AlphaTerra, Jaffarian served as CIO at Efficient Capital Management, LLC, where he ran the firm’s manager search, due diligence and allocation processes while overseeing IT and Risk and serving on the Executive Management team. Prior to joining Efficient in April 2004, Jaffarian founded Petra Intraday Trading Systems, an emerging high frequency commodity-trading advisor. His career in the alternative investments field began in 2001 as a trader and researcher at Analytic Investment Management NV of Mechelen, Belgium. Jaffarian maintains a Series 3 license and an MBA from the University of Chicago’s Booth School of Business with Management and Economics focuses. Additionally, Jaffarian holds a double B.A. in English and Economics from Wheaton College, IL. Grant can be reached at:grant@alphaterrallc.com.

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