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Hedge Fund Case Study: Gérard

A case study of working with a German hedge fund manager, from old PM to starting and growing his fund.

Gérard is the manager of a top German hedge fund. Starting as a portfolio manager, as many fund managers do. As with most fund managers making the transition, his main concern was primarily one: develop the required leadership skills you don’t get from a finance/analysis background.

With Vasco’s coaching we diagnosed which portfolio manageurs were ready for more allocation. This allowed us to increase alpha. We increased allocations to the highest performers, carefully assessed beforehand.

I am confident this alone has counted an additional estimated 1% in our returns, not including performance improvements and removing biases in executing.

Gérard

A Dissatisfied PM

When I met Gérard, he was disillusioned with his current firm. Passed on a promotion for fund manager, but believing he had the skills to raise his own capital and fund, we first worked together on his influence and persuasion to convince possible allocators. We worked on setting goals for his new firm and aligned on strategy and execution.

During this period, it was important for Gérard to keep up his performance as PM and to make a clear separation of ideas for his current firm and strategies for his new fund.

A First-Time Fund Manager

Gérard took the jump and created his new firm with some seed capital. Boasting a lengthy resume in successful portfolio management, specifically in currency plays, Gérard had found he was not aligned with the previous firm’s leadership on his culture and values. So, he decided to leave and raise his own fund, creating his own firm, and hired a couple of traders.

As with many Fund Managers, Gérard found that he had all the technical and finance skills, but he lacked leadership capabilities. He had to, for the first time, balance the CEO and CIO roles, and needed help doing it.

Tools/Frameworks used:

  • Personality and leadership style assessments;
  • Assessment criteria for new hires;

Baby Steps

With his team in place and new money, Gérard felt nervous. He felt overwhelmed and at risk of losing several million of returns due to possible bad decisions.

In order to promote the right ideas from the get-go, we worked on the company’s top values, and worked that into the assessment criteria for new hires. Having the experience and skillset was necessary but not sufficient criteria for being hired at his fund. Gérard had experienced firsthand what it was to perform well but still not fit within the organization, and didn’t want to witness that again.

At the same time, we worked on calming Gérard’s emotions. We found out that many bad behaviors that Gérard had curtailed over the years as a seasoned portfolio manager, such as “choking” on big opportunities, or loss aversion for clear losers, had suddenly come back. Gérard was conservative and was suddenly playing to not lose, not to win. And the traders were noticing this.

We did some work using a Cognitive-Behavioral approach in order to, first of all, find out which thoughts and emotions came up, and under which specific circumstances. We then worked on finding alternatives for these, to create more empowering behavioral alternatives.

At the same time, Gérard wanted to start with strong leadership. For this effect, we performed some leadership assessments in order to uncover his strengths and weaknesses, and what he could expect of his relationship with his traders.

Tools/frameworks used:

  • Corporate value discovery;
  • Leadership style assessment;
  • Refinement of assessment criteria for new hires;
  • Cognitive-Behavioral Therapy (journaling and thought replacement);

A Stable Leader

Once Gérard had stabilized his emotions and regained his footing, and his team was performing, some secondary issues were suddenly popping up. Two main issues in his opinion: his team wanted him to be more transparent about his own P&L record, but he didn’t want to feel vulnerable by opening up, and number two, he was having challenges with idea generation. Despite having a talented analyst, he wasn’t having enough ideas for new trades. And he wanted his traders to chip in as well.

We first tackled the issue of transparency in leadership. Being a player at the same time he was the coach, we examined Gérard’s values and came to the conclusion honesty/transparency needed to be one of the top ones. We needed to flip the script and make Gérard understand that being transparent about both his wins and losses didn’t make him weaker – on the other hand, it made him confident enough to share it with his team.

It wasn’t easy at first. But the key moment that drove it home was when Gérard was doing a monthly check-up review with one of this traders, and had to really drill down to understand why that trade had failed. In session, Gérard shared that he needed to expect full transparency from his traders in order to understand which ideas work and which don’t. I innocently asked “In that case, why don’t you start by giving them that transparency yourself?”. The lesson was hard, but Gérard adopted it.

Slowly, both Gérard and his trades started openly talking about successes and losses, without stigma or issue. A manual for vetting opportunities and to structure research was slowly formed, in order to capture the best practices of Gérard’s best trades, and some from his traders as well.

In terms of idea generation, it actually started getting better just with Gérard’s transparency. Creating a culture where people didn’t feel judged as easily, Gérard started unconsciously promoting an openness to sharing new ideas. Some of these didn’t pass the vetting, naturally, but some did, and quality ideas for new trades starting popping up.

However, that wasn’t enough by itself. We worked on creating a weekly brainstorm session, with no judgment, to stimulate the generation of new ideas, both by traders and the analyst. Although this wasn’t a fully formal process, it was the beginning of it.

Tools/frameworks used:

  • Transparent leadership assessment and guidelines;
  • Framework for vetting/evaluation of research/ideas;
  • Creation of a early idea-generation process;

Alignment Issues

Even after this consolidation, some new problems started occurring. One of the traders, hired before we worked on the values and criteria for new hires, wasn’t a full cultural fit (he ended up being let go later due to this lack of fit). Despite boasting an extensive record of successful trades and achieving good alpha in his book, he wasn’t completely aligned with the team.

We refined the values, both for assessing new hires and the current employees. Gérard wanted to put the other trader in charge of a portfolio of tech stocks, but wasn’t sure about him. We refined the assessment model in order to reflect the company values to make sure that Gérard was making the right decision.

On top of that, Gérard realized that his team wasn’t fully collaborating. His analyst had great ideas – and sometimes the traders did as well – but there was still a rift between the research for an idea and the execution. The traders didn’t completely agree on the research criteria used, and in some cases didn’t think the research was feasible.

We worked on a manual for trader-analyst collaboration playbook. We took the best ideas generated by Gérard’s analyst, that were approved and executed by traders, and saw what criteria they had in common. We created a playbook based on it, and promoted collaboration based on it.

At first there was resistance, as both the analyst and traders saw this as some interesting ideas being excluded due to not fitting the criteria – especially after they were asked to brainstorm new ones with such intensity.

Eventually, the new process generated more quality ideas – albeit fewer ones – and standardized the collaboration between traders and analysts.

Tools/frameworks used:

  • Refining of assessment criteria for both new hires and current employees;
  • Creation of a trader-analyst collaboration playbook;

Big Boys

With this stability and standardization, Gérard started hiring a couple of new traders and analysts, having promoted one of the initial traders to PM and having to unfortunately let go the other one due to bad cultural fit.

With this, the firm started scaling. We analyzed Gérard’s usual schedule – which was growing hectic. We came to the conclusion Gérard wanted to do fundraising and close allocators, also manage the people, but not any of the operational stuff, so he hired a partner he knew to take care of Compliance and Legal, among other aspects.

We worked on vetting the partner for cultural fit and values, which he did, and also alignment with the current team. The first two months were a bumpy road.

The collaboration manual between traders and analysts had to be changed, as with ideas and traders on new sectors, the same global criteria couldn’t be used. We repeated the same procedure: absorbed best practices from the ideas that the traders executed well and with high return, and made that a system for trader-analyst collaboration.

We also had to refine the system for idea generation, refining the structure and frequency of the brainstorming sessions. The number of ideas was still not the ideal one, but it was slowly getting there.

By that time, it was important to work on a mission and vision for the firm. Although we had defined the core values, we diagnosed that Gérard was not selling the vision hard enough. The traders, analysts and PM needed to know what they were working for. What culture, vision, big purpose they were working out for. We consolidated the firm’s values around a unified vision that Gérard could sell to employees.

Tools/frameworks used:

  • Refining of assessment criteria for new hires;
  • Analysis and consolidation of Gérard’s schedule and daily operations (delegation and elimination of tasks for optimization);
  • Refinement of the idea generation process + trader-analyst collaboration playbook;
  • Unification of values + creation of vision statement for employees;

Before Vasco I did not have the clarity for creating a process for idea generation, validation, and writing down rules for collaboration of traders and analysts. But it worked very well!

Our best portfoliomanageurs can now repeat their best trades, and analysts created a repeatable process for analysis. We have the best of both worlds!

This creates significant basis points increases in most trades which accumulates. And saves alot of time.

Gérard

A Crisis in the Family

It was by this time that Gérard had a family problem, which caused him to lose focus and make a few emotional trades without proper vetting, which caused a loss in his book. Not huge, but significant enough to throw him off his game for a while.

We worked together in closing the chapter and moving on. This had some effect on the traders, but more than that, it affected Gérard’s culture of transparency and openness. He was reluctant to open up with his team, and they could sense it. It was a tense situation that wasn’t getting better.

We worked to get over Gérard’s fears and schedule an all-hands session with his whole team, where he came out and shared with everyone how he failed, how he was not aligned with the company’s vision and values, and how he would not repeat that. The team saw his vulnerability as a sign of courage and leadership.

Despite that, some specific traders were suffering from their own emotions, and we worked together to shape their thoughts and emotions under specific trigger situations, using a Cognitive-Behavioral approach for this purpose. We were able to mitigate and remove some negative behaviors like aversion to losses despite losing money, among others.

Tools/frameworks used:

  • Crisis intervention and coping mechanism analysis personal coaching techniques;
  • Catharsis/”closing the chapter” personal coaching ritual;
  • Cognitive-Behavioral approaches (journaling, thought replacement) for trader team;
  • Reinforcing openness and transparency as a leader;

Expansion

After a year and a half in business, Gérard came into the phase that was the most enjoyable for both: a cap raise. Closing deals to increase Gérard’s AuM total. Having already done this on a much smaller scale, this time we made a master plan for the cap raise.

We worked together on identifying specific personality and negotiator types of people. Pension holders, other fund managers, institutional money. We drilled on how to properly leverage pain points, articulate the fund’s exclusive strategy for higher alpha, but more than anything else, on how to properly convey the investment process for all prospect investors to view the fund as a competent, solid, detail-oriented institution.

The hardest part of this phase was not the actual “sales” process itself, but the conjugation of it with the CIO role. Gérard had not only to close deals, but also to guarantee compliance and effective risk management on different portfolios of assets, with PMs with different idea generation processes and profit targets. Despite his partner taking care of many compliance and legal issues, as well as proposal creation, Gérard felt like he was constantly juggling many balls, and we had to tackle alternative topics every week in order to cover the full spectrum of issues.

Tools/frameworks used:

  • Personality and negotiator style diagnosis for allocators;
  • Role plays and rehearsing of investment process articulation for allocators;
  • Negotiation techniques for alignment on key provisions of investment (redemption period, returns, commissions, etc);

Balancing being the manageur of the fund and the operation side is one of the parts I most liked about the coaching. It’s hard to balance finance and management.

With Vasco’s help, I was able to balance both sides better (it is still a fight, but a smaller one now), and prioritise essential tasks on the investment, compliance and operation sides.

Gérard

A Growing Endeavour

From inception to growth of the fund, Gérard found value in gaining clarity about the company’s culture and values, specific strategies to hire and retain top talent for the firm, remove biases and standardise processes for idea generation, vetting, establish profit and risk targets, integrating trade performance into bigger portfolio plays, and other elements.

Joined with coaching on persuasion and negotiation techniques for his cap raise(s) (started the 2nd last month), although the fund has been achieving double-digit alpha with a low Sortino ratio and controlled VaR at any one point, the process is by no means easy or simple.

Every month Gérard and the fund face new challenges, ranging from an emotional issue affecting a trader’s execution or a new allocator that might come on board.

I leave the closing remarks to Gérard himself.

Work with Vasco has been demanding yet refreshing. It is easy to get lost when you have to do so many topics at the same time. His efforts to help me get clear and find the path around each obstacle have been valuable when I needed them the most.

I consider his feedback and recommendations invaluable both for me and portfolio owners. He helped us refine and protect our investment process. Especially with ideas and risk. And sell that process to institutional investors too.

With this, we have made our trades a repeatable process with a specific system, repeating the best of our best people. We have gained at least some million in trades and saved almost half of that in employee time saved!

He has also helped me personally in a crisis situation when a family member became terminally ill and i had to stay on the wheel of the fund and I just wanted to give up. This was invaluable moment and helped me more than I can ever write about.

TY Vasco for these results. As Managing director I take pride in knowing a good investment. And this has been one of the best.

Gérard

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