As head of investment research at RMF overseeing due diligence and the RMF investment process, the universe Jaime Castán and his team must survey has grown exponentially over recent years.Previously with Vega Asset Management, Castán keeps busy. Very busy. With 299 funds on RMF's shortlist (of these, they are currently invested in 296), 140 pending approval and a comprehensive manager-evaluation system for Castán and his team of 37 to perform, there is rarely a dull moment. In 2005, they conducted 1422 manager meetings. The final number in 2006 will be even higher.RMF's manager-research process involves not only the typical quantitative and qualitative evaluations, but adds to this an independent legal evaluation and operational due diligence. Managers are ranked from 1-5 in each category by the different teams, which comprise legal and audit experts, ex-hedge fund managers and ex-traders, among others."In other FoHFs, the investment analysts visit managers and cover all aspects of the due-diligence process. At RMF, we cover the qualitative, operational and legal due-diligence aspects with separate teams, as we believe the skills and expertise needed in these areas are very different from each other".The 14-strong quantitative analysis team at RMF does not just run returns data, Castán explains: "We will not only run single-fund and peer-group analysis, but also in-depth risk/return analysis, factor decomposition and persistence of alpha." RMF's factor decomposition involves examining momentum, the 3 Fama-French factors, and macro factors such as changes in interest rates and credit spreads. This is done monthly. "Look at the track record and you get a partial view, but you won't find out about the quality of the returns," Castán says.The process's legal portion evaluates the set-up of the management company and reviews documentation, while the independence of pricing and functions such as risk management (or lack thereof) are also verified. All ratings are reassessed quarterly.Castán notes that in an industry that is rapidly expanding and becoming more institutionalised, building a uniform and scalable process is crucial. "Our process and team are built under the premise of delegation and scalability, unlike the traditional FoHF set-up with two or three senior managers making the selection of the underlying hedge funds, and a team of analysts writing reports."Given its recognition and solid reputation, RMF is a natural first call for new hedge fund managers, Castán says. The company also leverages on its vast contacts network fo find new investment talent. Databases are only used occasionally, and for very specific strategies."Those of whom we take a dimmer view are those whose numbers do not stack up to peers', whose skills do not match their chosen strategy, whose risk management is not independent from the investment function and those who lack specific guidelines comparable to peers".Castán concedes strategies evolve as do managers pursuing them, and he emphasises that neither his team nor RMF wish to impose a style on their underlying managers, "We do not want to inhibit the flexibility of the manager, but we want him to trade the portfolio based on the rules they have presented to us". And yes, your references will be checked....
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