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Montreal Exchange Conference

Montreal Exchange Conference. SELECTION PROCESS AND THE LIFE CYCLE OF HEDGE FUND MANAGERS. Mario Therrien Caisse de dépôt et placement du Québec August 19th 2005. Agenda.

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Montreal Exchange Conference

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  1. Montreal Exchange Conference SELECTION PROCESS AND THE LIFE CYCLE OF HEDGE FUND MANAGERS Mario Therrien Caisse de dépôt et placement du Québec August 19th 2005

  2. Agenda General Overview of CDP Hedge Fund Program 1 Selection Process and Life Cycle of Hedge Fund Managers 2 3 Other flags to look for

  3. General Overview of CDP Hedge Fund Program • Part of the Absolute Return Group • Objective : Create and build diversified portfolios of international Hedge Funds • In-house process : 17 full time professionals • AuM : 3G $C (approx. 3% of CDP Total Assets) • 80 + funds invested in 12 different strategies worldwide

  4. Selection Process and Life Cycle of Hedge Fund Managers "Hedge fund managers can be tough to like, but it is difficult not to admire the great confidence and faith that they have in themselves,demonstrated the willingness to risk their future on their skills". William Crerend (1998)

  5. Selection Process and Life Cycle of Hedge Fund Managers • 5 phases in the life cycle of a hedge fund manager • Entrepreneurial Phase • Lasts approximately 18 months • Usually a manager that left another organization (other hedge fund, "Long only", etc.) • Critical issue : whether the entrepreneurial firm has sufficient capital to survive regardless of the market environment. The source of capital is also important (institutional, "hot money", etc.)

  6. Selection Process and Life Cycle of Hedge Fund Managers • 5 phases in the life cycle of a hedge fund manager (continued) • Wealth Creation • Alignment of the return objectives between the Manager and the Investor • Usually, Year 1 to Year 5 is the best period to invest • Other observations : • Emerging funds usually outperform older, more mature funds • "Younger" decile funds are beating older funds by 970 bps. (source : Cross Boarder Capital) • Investors should invest in the first three years of a fund

  7. Selection Process and Life Cycle of Hedge Fund Managers Value of a Traditional "Long Only" Company Performance Assets under management

  8. Selection Process and Life Cycle of Hedge Fund Managers Value of a Hedge Fund Company Capacity Constrained Limits Performance Assets under management

  9. Selection Process and Life Cycle of Hedge Fund Managers • 5 phases in the life cycle of a hedge fund manager (continued) • Wealth Enjoyment • After 4-5 years of managing a successful hedge fund, the manager accumulates enough wealth that his lifestyle can change significantly. • On the other hand, certain managers are more ascetic or philanthropic. • Critical issue : in both cases, is the focus of the manager still dedicated to money management.

  10. Selection Process and Life Cycle of Hedge Fund Managers • 5 phases in the life cycle of a hedge fund manager (continued) • Wealth Preservation • The Manager, given is shift in his focus, hires young talent to transfer the informational "DNA" of his edge. • Wealth succession and/or distribution • The Manager (Principal) recognizes the importance to create a succession plan. • Transferring part of the equity to the core of the management team.

  11. Selection Process and Life Cycle of Hedge Fund Managers • Adaptability vs Intellectual Property Intellectual property High probability of survival High Low High High Flexibility to respond to changing market environment Adaptability Low Low Low probability of survival Value of franchise High Low Source : UBS

  12. Other flags to look for • 5 "Yellow flags" in investing in Hedge (Louis Moore Bacon – Moore Capital) • Size of the Fund • Financial Leverage • Transparency • Funding • Hubris • 3 types of Hedge Fund Managers • "There are those who know they are in the game" • "There are those who don't know they are in the game" • "There are those who don't know they are in the game and have become in the game"

  13. Profile of a Future Hedge Fund Manager

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