There is no such thing as a perfect hedge fund – we are all trying. So in my role as a consultant to hedge fund portfolio managers (PMs), I am usually carrying out remedial work in some dimension. Sometimes, it can be about the positioning of hedge funds commercially, but usually, it is about what the portfolio managers are doing.
One of the key elements I have to investigate in my consulting work is the relationship between team members. I'm going to discuss one project I did with two joint-portfolio managers of an equity long/short hedge fund. This discussion is to raise issues and to describe ways of working. The team in this case comprised two members, PM "A" and PM "B", and they ran reasonably successful long-only products. There are three topics in this snapshot – the ground rules were not well established in this example, there were some important differences in style (personal and investment style) that got in the way of successful team working, and one of the portfolio managers had an unusual trait which had a bearing on his money management style. Finally, I have included some of the solutions I gave to the portfolio managers and their boss.
It is not unusual for a team to move from running long-only money together to managing a hedge fund. In doing so, there will, of necessity, have to be new rules of engagement. Clarity of the decision-making process is very important for internal purposes (for accountability and reward) and for external parties like potential investors. It is important that there is agreement about the specific roles to be taken, and that there is a buy-in from the off of the structure adopted. A successful agreement or understanding will have a level of detail in it that may surprise some.
One of the most basic areas not made explicit in this case was the fund's objectives and the consequences that follow from that. The two portfolio managers did not have a common, agreed understanding of what returns would make the fund they both ran commercially attractive. Therefore, they did not feel the need to measure their portfolio level risk and monitor it – where they taking too much or too little risk? They just didn't know.