While there are multiple ways to allocate resources for a hedge fund, there is a precise process funds should use to divvy up resources based on last year’s performance. Arootah’s Founder/CEO Rich Bello, previously Co-Founder/COO of Blue Ridge Capital, suggests breaking the process down into the following ten steps.
1. Consider your Portfolio Management Resources.
The focus of the portfolio manager (PM) in allocating resources should fluctuate every month but not based solely on the performance of the fund but rather based on whatever is needed for the peak performance of the fund. Ultimately, the success of your fund is dependent on the articulation and implementation of policies and procedures upon which you build a risk-adjusted portfolio capable of generating positive returns regardless of market conditions.
2. Generate Great Ideas. (Not as Easy as it Sounds!)
Your success in building a high-performing, diversified portfolio is entirely incumbent on your ability to generate new ideas. Developing and formalizing a process to help you uncover new and unique investment opportunities is a constant challenge, but you can set yourself apart from other funds by mastering it.
3. Conduct Best-in-Class Research.
What exactly is the value proposition you are selling to investors with regard to your competitive advantage in picking investments? Expand and streamline the tools and methods you use to conduct thorough and compliant research through process improvements and quantifiable decision-making techniques.
4. Root Your Decisions in Conviction.
Strengthen and standardize the means by which you and your team overcome the uncertainty of investment decisions by developing and implementing tools to enhance decision making, communication, and selection capabilities.
5. Be Honest about Risk.
Identify and work to mitigate the ongoing and never-ending list of investment risks. The methods you use, how you articulate those to investors, and your ability to ultimately control those risks specific to your asset class will significantly enhance your returns.
6. Innovate Your Tech Stack.
Do you have the appropriate tools to support and enhance your efforts at every step of the investment process? With ever-changing market systems and technology, you need to regularly consider using more efficient and cost-effective measures to improve your process and margins.
7. Nail Data Science.
One of the biggest challenges that firms face — and it can undermine their entire investment process — is the quality and integrity of the data. (Arootah can help you select and implement cost-effective solutions at your fund as you choose and manage data providers and vendors).
8. Be Thoughtful about Trading Venues.
The number of choices and venues for trade execution is constantly evolving — particularly with innovations in technology — and these changes have a definite impact on your ability to source liquidity, achieve best execution, and generate alpha. Your management of the trading process is critically important to investors and regulators.
9. Compliance, Compliance, Compliance.
The number of SEC cases and enforcement actions in 2022 related to the research and investment activities of firms has continued to grow. Establish the necessary tools, training, and control measures your firm needs to meet all legal and regulatory requirements — particularly with regard to material non-public information and the use of expert networks; this will help protect your firm from costly violations.
10. Hire the Best Talent You Can Find.
The PM manages two portfolios: Its people and its investments. By far, the most valuable resource is your team, but many firms fail to invest the time and focus they need to create a cohesive unit through hiring, compensation, performance measurement, and termination practices.
The Bottom Line
The allocation of resources is like “water” for a firm. Just as proper watering nourishes a plant, maximizing your resources nourishes a firm. Make sure you have the “water” to keep your firm in good health. By accurately allocating resources, you can operate at peak performance.
At our upcoming goal setting workshop, we’ll cover how to set goals for each of these areas in your firm. Designed specifically for hedge fund leaders and their teams, this workshop teaches you our tried-and-true process and provides you with on-the-job-developed examples of goals and plans to ignite your firm’s success. Register here.