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How Asset Managers Cultivate Behavioral Institutionalization

In CEOs/CIOs that I coach, especially those that aim to have institutional quality operations and be of institutional quality themselves, I talk about what I call “Behavioral Institutionalization”. This is a simple framework of establishing behavioral habits that will accelerate and consolidate the adoption of institutional-quality processes to raise from allocators and attain higher performance.

Definition and Components

Behavioral Institutionalization is the name I give to a very select set of behaviors, both by fund managers, investment and research teams, to having a tight, cohesive, aligned team that hedges against personal flaws and delivers superior returns. It comprises:

  1. Superior cultural alignment (superior Cultural Cascading);
  2. Superior investment and research team support (The GCUR Framework);
  3. Superior allocator influence (The ALPHATALKS and PPP Models);
  4. Superior talent leadership and influence (for retention and development);

1. Superior Cultural Alignment

All talent development, allocator relations and performance, at the end of the day, starts with superior culture. There are multiple elements to culture, but the ideal culture for an investment firm is an elitist culture with strict standards and a deep indoctrination process for new hires.

Besides definition of desired culture, the Cultural Cascading framework suggests the analysis of the fund manager’s positive and negative behaviors and how those will cascade to every wave of hiring later on. The framework goes much deeper into the distinction between virtues and values, analysis of transference and displacement, among others, but just having a general idea is essential to effectively manage.

Superior behavior comprises the creation and alignment with a superior culture, vision and values.

2. Superior Investment and Research Team Support

Behavioral institutionalization involves superior empowerment of research and investment teams. This can be done with individual processes and interactions, but a good framework is the GCUR framework. There is a dedicated article on the framework and each process within it, but in short, there are four key processes as part of it:

  1. Idea Generation;
  2. Trader/PM-Analyst Collaboration;
  3. Trader/PM Unblocking;
  4. Trader/PM Risk and Construction Alignment;

Idea generation support consists of individual and group brainstorm activities to stimulate and evaluate idea volume and quality. Analyst-trader collaboration support consists of activities to bridge the gap between research and investment thesis, possibly replicating best cases to improve models and processes.

Trader/PM unblocking support consists of private and/or group sessions, “traders anonymous”-style where traders can open up about successes and failures, both theirs and others’. Risk and Construction alignment support consists of individual and/or group sessions to address excessive or lacking risk-taking behavior and aligning with risk management principles, and also alignment with other fund/portfolio goals, expectations and requirements.

2. Superior Allocator Influence

Behavioral institutionalization comprises the effective use of influence and persuasion for prospective and current allocators. Not forgetting the fundamentals is mandatory. Besides this, a good model that can be used is the PPP model, which splits allocator influence into three key components:

  • Performance;
  • Processes;
  • Persuasion;

By separating the three, the superior money manager can focus on Performance and Processes outside the meeting room, and focus on Persuasion during the meeting (which involves but is not limited to clearly articulating the investment process, tailoring presentations to educate private investors and provide detail for institutional ones, tailor communication to different personality types, and more).

3. Superior Talent Leadership and Influence

Finally, the actual management and leadership of talent for a superior, institutional-quality CEO/CIO is based on the proper leveraging of leadership and influence techniques. These can start with a self-assessment using the Leadership Polarization Profile and can include the effective use of Emotional Intelligence and effective conflict resolution, for example.

The support of long-term talent growth, the creation and management of a multi-factor assessment (including not only performance but contribution to firm processes, teamwork, culture fit, communication transparency with management and others) and the proper frequency and structuring of talent feedback (namely feedback contributing to the improvement of investment execution) provides a framework for superior talent management.

Case Study: Newly-Created Fund

I worked with a PM-turned-fund-manager that was having some issues with his initial team. Having hired some talented folks, he wasn’t sure how to effectively lead them, and what to do, especially when conflicts arose about specific trades or other issues.

We started by talking about culture. We defined the desired values for him, and what the actual behavior was right now. We found out some discrepancies – while the firm valued reliability, due to his hands-off approach, PMs were free to try approaches that caused drift and in some cases even entered drawdown enough to affect the whole fund. We rectified this by clarifying behaviors and attitudes expected (we already did a part of the work for being an institutional-quality CIO here, clarifying portfolio expectations and requirements to make sure traders knew what was off-bounds).

Then we focused on actual talent management. We diagnosed his leadership style, which had one or two extremes here that should be address, namely being hands-off and being very risk-oriented. We focused on proper talent management governance and defined a model for the traders/analysts to be evaluated by.

After “stabilizing” returns and the investment process, I helped him formalize it in order to better sell it to allocators later, as part of a bigger model with several components.

Conclusion: Towards Behavioral Institutionalization

The trend towards the institutionalization of hedge funds and asset management firms triggers a need for the institutionalization of fund manager/CEO/CIO behavior, covering several areas from effective influence from talent to allocators and the effective leadership, guidance and support of people and processes in the fund/firm.

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