It is an inalienable duty of citizenship to serve as a potential juror – to be vetted among one’s fellow citizens by both prosecution and defense as potentially suitable and capable as an objective, forthright, transparent and well-intentioned member of a select group that will ultimate dictate a person or group’s civil or criminal fate.
In many ways, the process of coming up with 12-plus-two is similar to what fund of hedge fund (FoHF) managers go through when building their own stable of managers: selecting, questioning and figuring out whether each manager is the right fit. This includes measuring whether he or she has the wherewithal to fit into the comfort zone of the broader mandate, but enough flexibility to also make their own calls without undue influence or compromise.
Back in May, accounting and consultancy firm Rothstein Kass released a short but sweet report on the FoHF industry (click here for AllAboutAlpha.com’s coverage of the survey), noting that nearly half of the respondents surveyed expected increased competition from single-manager vehicles, and over 45% greater competition from institutional investors replicating FoHFs internally.
In response, the survey found that 60% of FoHFs were providing more transparency to investors and at the same time trying other ways to prove the inherent value of allocating to multiple managers, including better liquidity management, less use of leverage, more use of communications and more diversification. The chart below from the report shows respondents’ intentions to try and level the playing field to better entice investors.
In other words, broadening the base of potential “jurors” and spending more time whittling down the golden 12-plus-two to ensure they were the right mix and the right fit for the “case” and up to the task.
“As they seek to raise new capital, however, fund of funds managers are finding that institutional investors are placing a greater emphasis on due diligence processes. By continuing to act institutional themselves, fund of funds can provide a window into their operating environment to restore investor confidence and effectively compete with single manager vehicles and fund of funds replication strategies that are more aggressively pursuing institutional assets,” Rothstein Kass’s report noted.
Still, like jury selection, the process of finding that perfect group is long, difficult and often elusive, depending on the quantity and quality of jurors, and the randomness of life in terms of which citizens are lucky enough to get a summons to show up to which case involving which alleged wrong-doer.
From a relative perspective, FoHFs have to constantly comb their databases of managers, looking for the right individual, strategy, terms, fees and “camaraderie” with the rest of the portfolio – all while ensuring the manager is open to new capital, can absorb an additional allocation and isn’t going to be swayed by the case (or in hedge fund terms, suffer from style drift), or worse, pull a John Grisham / Bernie Madoff.
At the end of the day, the system only works if lawyers for the prosecution, lawyers for the defence the judge and 12 people plus two alternates all agree to work together to hear the charges against one of their fellow citizens and collectively work to figure out a resolution.
So too will it only continue to work for the FoHF world if they drop some of the exclusivity and focus more on working with both managers (jurors) and investors. Then again, the jury is still out on whether FoHFs are at the prosecution or defense table.