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Investment Manager selection (Components of manager selection (Universe…
Investment Manager selection
Components of manager selection
Universe
suitablity
Style
Active vs passive
Quantitative
manager performance track record
attribution/appraisal
Qualitative
Investment due diligence
operational due diligence
Investment philosophy
passive = seek premiums from factor exposures
active = security mispricing can be both identified and exploited
Investment personnel
expertise and depth
key person risk
Decision making process
signal creation/idea generation
Signal capture/idea implementation
portfolio construction
monitor the portfolio
H0 : manager skill = 0 (no skill)
if we reject null hypo -> have skill
Type 1 error
hiring/retaining manager who subsequently under performs
type 1 errors are more painful as easier to measure and explicit costs
Cost are driven by characteristics of the return distribution of the managers
skilled manager have tighter distribution and higher expected return than medium managers
Type 2 error
not hiring/firing manager who subsequently outperforms
harder/less measured as it is opportunity costs loss
Style analysis
Return-based style analysis
top down approach in estimating the port sensitivities to security market indexes representing range of distinct factors
requires returns only
comparable across managers through time
provides objective check NOT subject to window dressing
Holdings-based
bottom up
classified the actual holdings in a portfolio point in time
comparable across manager and through time
subject to window dressing
more complex and needs manager transparency
does not reflect going forward for high turnover portfolio
Cost and benefits of pool vehicles
Separate managed accounts
:check: ownership
:check: customization
:check: tax efficiency
:check: transparency
:red_cross: higher transaction costs
:red_cross: does not scale well
:red_cross: investor behavior risk
Pool/commingle vehicles
opposite advan/disadvan the separate manged accounts
Performance based fee
1. symmetrical structure
both down and upside
base + sharing performance
2. Bonus structure with downside limit but no upside limit
higher of base or base + upside
3. Bonus which downside and upside are limited but not symmetrical
higher of base or base + upside limit