Our analytics resulted in a $ 300 million investment into a Hedge Fund. This is how we did it!!

Our analytics resulted in a $ 300 million investment into a Hedge Fund. This is how we did it!!

Magistral Consulting (www.magistralconsulting.com) was approached by a Family Office for an assignment related to finalizing a Long-Short Equity Hedge Fund. Our assignment was to find a fund that generated alpha over a long period with minimal risk. We also needed the fund to be focused in a specific global region, have minimums in terms of investment value, a threshold AUM and vintage of the fund. Here are the steps that we took to identify the fund:

1.      Secondary Research for all best performing Asset Managers in the region: We searched the internet for all the best performing Asset Managers in the region. It ended in us drawing a list of more than a hundred Asset Managers in the region. This was pretty much the universe of Asset Managers in that specific region

2.      Finding the fund satisfying the criteria with the Asset Managers: We reached out to all the Asset Managers for the funds that satisfied our criteria (like minimums, AUMs, regional focus, etc.). This reach-out was done over the emails and several calls.

3.      Information gathering from all relevant Funds: We asked for Net Returns MoM since inception for all the funds that satisfied our initial criteria. This information was fed into our analytics model that calculated all fund performance parameters like Cumulative Returns, Annualized Returns, Standard Deviation, Sharpe Ratio, Sortino Ratio, Max Drawdowns, Average Up-capture, Index Capture, Average Down Capture, Index Correlations, and several other objective and subjective parameters. This process took weeks as many Fund Managers needed support from us in calculating the metrics, some needed multiple follow-ups for the information to be provided to us. The picture became clearer when all returns information was fed into the model separating the performing funds from the non-performing ones. The robust model also ensured proper consideration of risks taken by the fund manager to deliver the returns. Best performing funds were shortlisted for the due diligence

4.      Due-Diligence of shortlisted funds: Due diligence involved preparing a detailed report running into tens of pages analyzing all operational aspects of the Asset Manager and the fund. The parameters on which information was collected and analyzed, included Information on Human Resources, Compliance Frameworks, IT and Business Continuity, etc. for the Asset Manager or the Management company. For funds, we collected information related to Legal framework and structure, Transactions, Valuations and Accounting, Risk Management and Monitoring, Service Providers (Admin, PB, Auditor, etc.), Ownership Structures, Current Investors and their holdings, Key personnel bio and their relevant experience, Exception to general allocation rules and several other parameters

5.      Evaluation of fund performance on all parameters: There was a sanity checklist that was made. A questionnaire was also designed to collect information from funds over a meeting. Once verbal information was collected documentary proofs were analyzed to prepare the level of depth related to each parameter. On the basis of numbers, proofs and documentation; a rating was arrived at, for each of the fund parameters. As per the weightage of each parameter and fund performance on all parameters, a recommendation was made for the investment in one chosen fund.

This was one of the examples where the Magistral team worked closely with the client team to arrive at a recommendation that moved millions across a cross-border transaction, into a fund that has a solid track record of providing superlative returns when compared to others.

We are in the process of doing due diligence for several other funds as I write this.

The Author is the CEO of Magistral Consulting (www.magistralconsulting.com), a research and analytics firm, that helps Family Offices in identifying best performing fund managers. For any inquiries you can reach out to him at Prabhash.choudhary@magistralconsulting.com

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