Each year, as part of its sponsorship of the GAIM Cayman conference, Walkers invites one of its industry leading clients to attend as a keynote speaker and share their unique insights with delegates. In recent years, conference attendees have enjoyed presentations from renowned hedge fund manager George Hall, founder and president of The Clinton Group and Wall Street media commentator Charles Payne. The Journal reports. First in a two-part series.
As Managing Member, Founder and Chief Investment Officer of Parker Global Strategies, Virginia Reynolds Parker has since 1995, overseen the development of the alternative investment solutions provider. An industry pioneer, with a long association with Walkers, Virginia Parker developed and launched the Parker FX Index in 1992, which is today considered one of the major benchmarks for the performance of FX managers. In 2004, the firm launched a fully transparent fund of fund, one of the few that is still available today and more recently launched one of the first specialist multi-manager Energy and Infrastructure Funds.
Significantly, in this post-Madoff climate of increased investor concern, Parker Global Strategies was one of the first risk practitioners to establish a risk methodology based on position level transparency through managed accounts. Virginia Parker, therefore, has an excellent perspective on the kinds of questions that need to be asked when performing due diligence on investment managers and this was the thrust of her presentation to GAIM Ops Cayman 2009.Recalling a January 2003 visit to a UK-based pension fund, Parker outlined how that pension fund was drawn to a competitor’s fund of fund that was ‘full of superstars’ and also attracted to a single manager fund by the smooth returns that were on offer. “They didn’t invest with us and ended up as one of the victims of Madoff,” she said.
“Today the hedge fund industry has a tarnished reputation,” Parker said. “There have been some crooks and some have behaved badly, while some have been incompetent and others have done a good job, but we are all in the same boat,” she said, adding that the industry generated five years of good returns until July 2007, resulting in massive inflows of capital. The period since then, she said, can be characterised by a quote from Bill Gates: “Success is a lousy teacher. It seduces people into thinking that they can’t lose.”
Going by the ‘Hedge Fund Implode-o-Meter’ on HF-implode.com, at least 115 major funds at 70 outfits have imploded since late 2006. While there have been a few frauds, many of these failures have been the result of poor risk management, Parker said, highlighting one example from March 2007 where the risk manager from one of those firms knew that the fund was over-levered but couldn’t get management to listen to him. “You don’t need to be a rocket scientist to have an edge,” she said, “just follow some basic principles.”
Among these principles is the mantra to invest in people and not numbers. “If problems arise then the people will still be there,” she said. Also, more complex strategies are typically associated with the bigger blow ups. “Really complicated strategies are not good for the long term, while secretive organisations and people tend to be hiding something,” she said. “Really arrogant managers are another danger as they are often so confident that they are not focused on what is actually going on.”
Where managers have separated themselves from the crowd with their investment strategy and are performing differently, it is important to be comfortable that the manager understands what they are doing. Taking two divergent examples to make her point, Parker first pointed to Amaranth Advisors. Here the multi-strategy credit arbitrage fund added natural gas futures to the mix, clear “style drift”, resulting in one of the biggest fund collapses in history. Contrast this to Paulson & Co. which also switched strategy – shorting subprime – resulting in a markedly different outcome to Amaranth. “The difference was that Paulson was open,” Parker said, carefully explaining his instruments for exposure and controls for risk. “Investors can do the work and determine if they were comfortable. This is an important reason to intensify due diligence.”
As Warren Buffett is noted to have commented: Risk comes from not knowing what you are doing, which makes it equally important to understand what others are doing.