Hedge fund managers say range of skills needed for success

What skills are most important for a hedge fund manager?

Nick McEwen, Revere Capital Advisors
At the crux of every successful manager is a drive to outwork, outthink and outperform the competition. Foremost the manager will have displayed a natural ability to invest well and will constantly strive to develop this instinct. This is not just about performance but about process, which will have been something honed over several years, perhaps at several firms and oftentimes based on an innately intellectual foundation.

The manager will need deep analytical skills and a profound understanding of the market on which they are focusing. The best of them will not only know their strengths but know their weaknesses.

The manager will have developed skills in constructing and managing a portfolio. When compared to picking stocks or calling exchange rates, managing a portfolio is very different. The very best hedge fund managers are exceptional at both jobs.

Perhaps most importantly the manager will have an entrepreneurial spirit and will always be pushing forward, inspiring confidence in his team with continuous, dogged tenacity.

Finally, the successful fund manager will have experienced adversity at the portfolio and business level and managed it admirably. To paraphrase Kipling, if they have met with triumph and disaster and treated those impostors just the same, then he will be around for a long time.

Thomas Wehlen, Coburn Barrett
A good fund manager needs common sense, good nerves, a lot of patience and the honesty to know the difference between skill and luck. He (or she) need not be able to see the future. If anyone could really see the future clearly, he would not need to invest other people’s money; he could simply sit on the sofa managing his own.

Many managers delude themselves that a few years of outperformance means they have a superior fund. It most certainly does not. To prove unquestionably that one can ‘beat’ the market, one must be able to do so for many years.

A great many hedge funds go out of business within the first three years of operation. This is not evidence necessarily of the ineptitude of the manager, but of the risk of his investments. An investor should realise if a hedge fund manager is incentivised to take high risk, he will.

Instead of analysing a fund manager’s personality, an investor should ask: How risky is this fund? How volatile are the investments within it? How much am I being charged for a one-year so-called outperformance?

Ewan Graves Tamvakis, Ridgeway Capital Group
While the variety of hedge fund strategies can call for differing skills, the best managers share these common traits.

Judgement: news, data, activity, analysis and opinion are essential for perspective but bring a sea of noise which must be weighed by experience and developed into a clear picture. Understanding how this relates to the mechanics of a strategy is essential to effectively judge the level of risk-return being engaged.

Conviction: born of experience, this is essential for action. Equally, a lack of conviction is an important signal and knowing the difference requires self-awareness. Good managers should normally generate enough ideas to produce performance, and also know when to disengage.

Adaptability: as markets constantly change and evolve, managers need to be flexible enough to recognise opportunities, respond to mistakes and continually hone their strategy. While in the short term this helps avert excessive loss, it also enables a manager to perform well through different cycles and conditions.

Consistency: the hardest to achieve, this requires all of the above plus the discipline and drive to maintain high standards. The most consistent managers become the most respected, and then they need to sustain sufficient humility to ensure their future success.

Don Rogers, Stride Capital Group
One key skill for a great fund manager is the ability to take action while accepting uncertainty. As Seth Klarman says, buying a public security is an act of arrogance because it assumes you know more than any seller. In today’s competitive world that should be humbling. Arrogance, closed-mindedness and stubbornness can lead to serious mistakes.

Taking an independent path takes fortitude, particularly in a marketplace with swirling public opinion and increasing emphasis on short-term returns. Conviction can never be reached with a complete picture because the picture is never complete. Great investors not only accept this uncertainty but embrace it.

With that mindset investments are thoroughly explored and only exceptionally good ideas get into a manager’s portfolio. This tends to mitigate the downside because risks have already been vetted. Surviving ideas tend to be better ideas, with the best probability for success.

A skilled fund manager must have hunger for knowledge and a drive to do the work. Experience and training direct these efforts in an effective way, and provide a framework to hang your hat on. But only by digging in and doing the work can a fund manager form conviction to act, while also accepting uncertainty.

K Daniel Libby, Vantage Point Partners
Hedge fund managers need a combination of investment and business skills to be successful. A successful hedge fund manager must have strong analytical skills and be able to evaluate an investment opportunity or risk and make the right decision, sometimes very quickly.

They also need the emotional skills to detach themselves from prior investment decisions. The financial markets can be volatile and unforgiving; typically the relative attractiveness of an investment will change over time. To succeed managers have to remain dispassionate and objective. Strong performance cannot be maintained over the long term without this ability.

On occasion it is the business skills that tend to be in short supply. This includes the ability to communicate well with investors and effectively manage staff. Managers have to be able to explain their investment thesis and the drivers of risk and return to investors. This is key to building good relationships and to allowing clients to properly evaluate the appropriateness of an investment strategy in their portfolio. The ability to communicate effectively with staff, understand their strengths and weaknesses and motivate them appropriately is also a critical business skill. Managers will not be able to leverage their own talents and abilities without maximising the contribution of those around them.

Together these are the ideal skillsets for a successful hedge fund manager.

Oliver Prock, Salus Alpha Capital
The textbook answer would be industry expertise, a network of contacts, modelling skills and strategic analysis skills. But if this was really all you needed, the markets would be completely swamped with hedge fund managers.

Hedge fund management is not just a science, it is an art. The best hedge fund managers have been passionate investors and have followed certain markets for years. They often think out of the box and make investment decisions contrary to the mainstream market opinion. This way they are able to develop their own personal investment style.

To be a good hedge fund manager you have to have common sense to identify optimal investment opportunities as well as to understand when assumptions were wrong to be able to cut your losses. Most of all you must have confidence in your decisions and consistency in your investment approach.