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.
- Matthew Litwin
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.
VIEW THE SLIDES >
(FOX Members only)