Quote from rufus_4000:
Hmm, I guess I have been busy trading so I missed this thread a bit.
Somebody mentioned that institutions are trying to fit your fund / CTA into a "box", that's exactly what they do. And in a way, if you were in their shoes, managing a few billion, and only allocating maybe 1-4% of their managed assets into "alternative investment", then you will see why they are trying to fit your strategy into a box. Not to sound arrogant or anything, but I have had to turn down a few offers (from HF incubators, and large funds wanting "front funds") for me to manage money (I am happy with trading with my own capital, and I have been with a few hedge funds before, so I know the routine fairly well). For a fund to get serious consideration in front of an institution, it has to have both a good "presentable" strategy and a decent track record.
Most small funds I have seen takes very little time explaining their strategy from an institutional sense, the managers seems to be caught between "not wanting to reveal too much" and "my strategy is very special". Both statements are not entirely true. From what I have seen, 99% of all strategies fit into a standard box or two, take time to explain your strategy in standard terms, very very rarely are there any "secret sauce". Especially if the manager was not with a top-tier firm before, the institution (or even HNW FOs!) tend to be suspicious of claims of "proprietary instrument selection process that produce high portable alpha". The "secret sauce", if anything, comes with tuning and experience. Two, very few small funds have realistic sense of risk management, they tend to say "we don't allocate more than 5-10% of our capital in one trade", and call that risk management, it is not, at least describe some standard scenarios then. Will the fund be using a risk system, does it do product / asset class correlation analysis? Does it do periodic shock scenario analysis? How often? Most good fund presentations devote at least 20-30% of the presentation to risk management.
Look at things from the institutional investor's perspective (say a pension fund), they are only allowed to invest a small % (1-4%) of their AUM into "alternative investments". And these guys have to explain their manager selections to their own investment committee (and these committee members have never seen an option, let alone more complex derivatives), so think about the story they have to tell, and the portfolio (basket) of funds they have selected. So it is not just a matter of chasing alpha, it is also about spreading out the investments across the different investment strategies, so that in the event of a market turn, the lack of correlation would protect the investment itself. In fact, pension funds and FoFs have taken to buy "hedge fund derivatives (i.e., fund options and protective puts) to further protect the investment. Disclaimer, I do provide some informal advisory stuff for two FoFs, so I guess I have the inside view, I guess.
Just my $0.02.
