A group of hedge fund allocators revealed the biggest "red flags" that stop them from placing money with an emerging manager at the Absolute Return Symposium in New York on Wednesday.
One thing to look out for is the classic "red Ferrari syndrome." In other words, the emerging manager who goes out and buys a fancy sports car right off the bat is someone you probably want to avoid.
There are some signs that are less obvious though.
"Bad coffee," said Kent Clark, head of the Alternative Investments & Manager Selection hedge fund strategies investment team at Goldman Sachs.
"Because if they have bad coffee, they usually haven't hired an [investor relations] person or somebody to do their sales. You have a small organization. You have the PM running around ... I literally had a guy who was open and closed in two years. They said, 'Well, I think this is just a matter of being really good with my calendar.'"
Basically, it's a sign that they haven't invested in the hedge fund as a business.
Michael Weinberg, chief investment strategist of Protégé Partners, also avoids emerging managers who "haven't sufficiently invested in the business."
"So along those lines, if they don't have the confidence or interest in investing in a marketer or a suitable business or back office. These days, new launches have to be institutional, and an institutional new launch today is very different from an institutional new launch from five, 10 years ago," Weinberg said.
Mark Yusko, the CEO and chief investment officer of Morgan Creek Capital, also likes to avoid people who aren't focused.
"People who get distracted — the guy who left me waiting in his office for an hour while he met with his architect was a red flag," he said.
Very few good PMs
Being distracted and not fully invested in the firm as business aren't the only things to avoid. Some folks just aren't cut out to be portfolio managers, according to Yusko.
"There are certain things that we really want to avoid. Part of it is this issue of analyst versus [portfolio manager]. There are lots and lots of great analysts. There are very few good PMs. Because a PM is whole brain. Analysts are left brain, OK, very much about the details, the numbers, looking in the rearview mirror. Portfolio management is about the future."
Toward the beginning of the panel, Yusko pointed out that the hedge fund industry is made up of 10,000-plus funds, but they aren't all good. He said there probably aren't even 1,000 good hedge funds.
"There's a very small number that has the talent to generate superior alpha."
Yusko also likes to avoid people with arrogance.
"People with arrogance will crush you every time," Yusko said. "Because in this business, if you're a legend, right — if you are George Soros, Michael Steinhardt, Julian Robertson — you're right 58% of the time. If you're a legend."
If you're someone who can't be "wrong," that's a red flag. To Yusko, humility and self-knowledge are really important attributes for a fund manager to have.
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