RECAP: 2019 FOX Global Investment Forum

Breakout 4: Hiring and Firing Investment Managers: Lessons from the Field

Presenter:
Matthew Litwin, Managing Director, Head of Manager Research, Greycourt & Co.

Session Description: 

Selecting good investment managers is challenging but knowing when and why to fire a manager is equally as important. This session explored a disciplined approach to ongoing manager-evaluation that can be used to increase the odds of making good decisions and decrease the risk of backward-looking, overly reactive firing. Using real-world examples, participants were provided a useful, approachable, and durable framework for evaluating investment managers.

 

"Know precisely what you are solving for, document your thesis before hiring, and constantly underwrite the opportunity set."
- Matthew Litwin
Key Takeaways: 

The Litmus Test in Action includes: 

  • Does the strategy make sense? Know precisely what you are solving for, document your thesis before hiring, and constantly underwrite the opportunity set. Do not become a fund collector (less really is more).   
  • Does the manager benefit the portfolio?  
  • Do: read every doc revision, not just the original LPA, consider how exposures and risks line up with other positions and use a robust and durable opportunity cost benchmark. Do not: get complacent or depend entirely on outside operational due dilligence, forget about taxes and liquidity—even if a fund doesn’t change, these can.Do not be vague about your cost of capital for every position.

Important to understand what you are seeing in manager behavior: 

  • If performance is strong (or weak), the root cause may be that opportunity set is a headwind or tailwind, not the manager. 
  • If positions make sense (or don’t), the root cause may be acts of research/risk control omission or commission. 
  • If teams are changing, there may be a fundamental (mis)alignment.

Things to remember when hiring and firing a manager: 

  • Hiring and firing managers are active investment decisions, but global alpha is zero. 
  • Putting in the work during and after initial due diligence will improve your hit rate if you’re not a genius or super lucky. 
  • Outperformance is episodic for the best manager. Patience is an absolute requirement. 
  • Understanding what the potential recovery is when things are not going well is also required. Your time is extremely important.
     

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