Capital Strategies Partners is using particular databases to find managers of niche active management strategies, and bring their capabilities and products to market.
The fund manager must convince CSP that it employs strong risk-management procedures, because clearly defined risk control systems are vital.
CSP will look to see if the fund manager adds value to the portfolio, either by enhancing return, reducing risk or both. This point is closely linked to the first: the managers have to have a defined style and a special talent, but the way they add value to a client’s portfolio is a vital factor. CSP needs to know whether the strategy is a core portfolio product or complementary investment, and whether the strategy makes sense overall.
A prospective manager must have an identifiable and repeatable process for their returns to be considered a result of skill. If the manager has a systematic process of identifying and capitalising on market opportunities, the returns are more likely to be skill-driven and therefore repeatable.
Milan says: “If the manager has limited infrastructure and is not particularly thoughtful about what advantage they have over other market participants, their performance is probably the result of the influence of some other factor, such as luck.”
One of the first steps in the review process of any manager is to perform a regression analysis of the fund’s returns relative to an index to determine which factors contribute to the overall manager’s returns. CSP seeks managers who have made a significant financial commitment to their own fund and who are interested in growing a long-term, sustainable business.
Even though a manager may pass the initial quantitative and qualitative reviews of the investment strategy, any material character issues uncovered as part of the due diligence process are likely to preclude an investment from being made.
While track record is certainly important, CSP is not constrained by any specific rule regarding the length of a manager’s track record.
On occasion, CSP has worked with managers with shorter track records, but who may have left a larger investment firm or investment bank. The manager must be able to demonstrate the portfolio management skills necessary to run an institutional business. Size is also not a determining factor.