CAIA Level II: Advanced Core Topics in Alternative Investments, 2nd Edition

38.5 MANAGER SELECTION

There are many different ways to fill up the strategy allocation buckets. Typically, the portfolio manager or strategy expert searches for the hedge fund manager who can best meet the goals of the FoF manager. This process, however, involves many difficulties, such as whether the identified hedge fund manager is even open to new investment. Unlike mutual funds, which are easy to access for investors, hedge funds are not always open for new investments. Some of the best hedge funds are closed to new investors after reaching the manager's capacity constraint, the AUM level beyond which the manager believes that additional capital will increase market impact and reduce potential returns. Also, the returns to some strategies can be closely tracked with just a few managers, while other strategy buckets may require a larger number of managers. Subsequently, the portfolio managers will constantly be on the lookout for improving strategy buckets with a priority list of possible hedge fund managers. If preferred hedge fund managers are not accessible, the portfolio manager works down a list of alternative managers.

There are times when a hedge fund manager needs to be replaced. Replacing a hedge fund manager consists of coordinating redemptions as well as reallocating capital. Once again, the portfolio manager will rely on a list of potential managers to fulfill this task. FoF portfolio managers are constantly attending conferences and capital introduction events, ...