Lois Peltz is the president and chief executive officer of Infovest21, an information services company, located in New York City.
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Money should just be their way of keeping score.
Look for managers who are motivated by what they do - not by big bucks. The best managers make a total commitment. They are motivated by a job well done and gain satisfaction in finding things that others don't. They love the intellectual and emotional challenge of the markets.
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It's like getting a report card every day.
Select a manager who has a strong work ethic , is intense , and is as demanding of himself as of the other people on his team.
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Look for continuity of organization.
Search for a manager who has developed a team approach rather than a star system where he alone is the decision-maker. Many of the best organizations are built around teams and specialists, divided by industry, region, trading strategy and/or type of situation. Having a specialist, decentralized organization helps keep talented key employees on board because they have a degree of decision-making authority and responsibility as well as a stake in the firm. In those organizations where a star approach exists, key employees eventually leave to start their own fund where they have more authority, decision-making power and responsibility. Key personnel leaving doesn't lead to a strong, lasting organization.
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Require them to eat their own cooking.
Select those managers who put a significant amount of their own assets into their hedge funds. This means they have strong conviction in their own talent. It also means their own net worth is highly correlated to the performance of their funds and thus, they have a huge incentive to generate excellent performance.
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Make consistency a virtue.
Find a manager who has a long track record and has generated consistently excellent returns during various market cycles. Examine years such as 1990 and 2000 which were negative years for the stock market (as measured by the S&P) as well as 1994 and 1998 which were difficult years for hedge funds.
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Acknowledge the survival of the fittest.
At various times, all managers have gone through adverse times. Look for managers who are willing to learn from their mistakes. It is not so much about being right all the time as being able to adapt and find a strategy that works. Losses are expected because ideas are being tested . The best managers worry when losses are larger than expected/ predicted or when risk levels are exceeded.
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Be sure that they are controlling the downside.
Search for managers who put as much emphasis on controlling the downside as generating returns to the upside. Specific risk management tools to examine include strategy diversification, maximum allocation per position, number of positions in the portfolio and degree of leverage, as well as stress testing and the ability to reduce allocations quickly.
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Technology is their friend - or should be.
Run from those managers who are afraid of technology. Technology is here to stay. Smart managers acknowledge the importance of technology information and rapid adoption of technology gives them an edge. They are able to harness information coming in and use it to their advantage.
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When opportunity knocks, do they open the door?
Look for managers that view the world as having rapidly shifting opportunities. Opportunistic managers allocate capital where the opportunities are.
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Be wary if the manager's goal is to be the largest hedge fund.
Be wary of managers whose primary goal is to grow assets as large as they can in order to collect management fees. The best and brightest managers are often closed to new investment, acknowledging that being the largest hedge fund is not their main objective - having the best performance is.