A superior fund manger/CEO/CIO, especially in order to achieve institutional-quality operations, must support their investment team in a proper way.
The CGUR model defines four key activities that fund managers can work on with their investment and research team to empower them and increase their performance:
- Idea Generation;
- Trader/PM-Analyst Collaboration;
- Trader/PM Unblocking;
- Trader/PM Risk and Construction Alignment;
Having a proper idea generation support process is key to achieving both high volume and quality of ideas. This all starts with the company culture and how open to creativity and innovation it is.
In practical terms, a fund manager can organize, for example, a weekly 1-hour brainstorm where the people responsible for idea generation can come up with new ideas and comment on others’.
In terms of stimulating individual creativity, traders and/or analysts can focus on obtaining additional information sources, using mental or mathematical models to plan scenarios, and exploring unique angles from their career/past to identify valuable investment ideas.
A superior CEO/CIO should foster the three elements, by:
- Defining a vision/company values that foster creativity and innovation (or at least don’t stifle it through negative judgment);
- Organizing and holding accountable traders/analysts responsible for idea generation during brainstorm meetings (accountable both for generating and giving opinions on key ideas);
- Having a sense of how individual talent structure their idea generation processes and rituals and being able to give general tips to improve volume/quality of ideas;
Effective research and investment processes must interact at the point where research becomes an investment thesis, and the failure to successfully make this transition can impair proper investment execution.
While good analyst-trader collaboration starts with the proper definition of both research models and process and portfolio/fund-level investment goals, expectations and requirements, the actual interaction between traders and analysts is also an important aspect to take into account.
Effective CEOs/CIOs can host short periodic brainstorm sessions where traders can talk about both successes and failures in adapting research into actual investment theses, and lessons drawn from them.
Success cases can also be replicated by taking the cases of the most successful trades and reverse-engineering them to determine which analysis models – or actual analysts have superior performance, and replicating those analysis models for further trades. Although a sensitive topic, asking less successful analysts to adapt analysis models of the most successful analysts can also help.
There are countless emotions and biases that can threaten proper investment execution, from the typical cutting winners short or letting losers run to much more nuanced behaviors under specific circumstances.
An effective CEO/CIO can promote “traders anonymous” sessions, again, possibly in a weekly brainstorm format of 1-hour, where traders/PMs can come together and talk about what they believe are their main current issues and how they can overcome them.
If the CEO/CIO themselves are open to sharing their own trading mistakes and how they got over them, they can contribute to the discussion. Firm culture also comes into play here, with people being much more open to sharing if they do not feel judged for doing so.
If not open in brainstorms, talent can share their opinions on trading issues with the CEO/CIO or risk management in 1-on-1 sessions. A good combination is to start with the 1-on-1 sessions where traders can open up individually, and then if possible have them air those same doubts and issues in a group setting.
Trader/PM Risk and Construction Alignment
Finally, related to the previous point but not exactly the same, is the specific attitude towards risk that traders/PMs have, and how to address it.
Several personality factors come into play, but in short, traders are usually either too risk-adopting or too risk-averse. Specific 1-on-1 meetings with risk management can help give guidance on how traders can improve their book. Maybe they are too cautious and risk-averse and need to size up on higher conviction trades, or maybe they are too risky and easily enter drawdown without regarding for current risk management process.
This can also either be done in a 1-on-1 setting or in a group setting. For situations where traders/PMs have the courage to talk about their risk profiles in a group setting, this yields maximum effect, as traders can learn not only from a set of “dry directions” from risk management, but actually understand how others are approaching risk and the consequences this has on their books.
Likewise, besides risk, there are other fund/portfolio-level goals, expectations and requirements of trades, that should be properly communicated and that that traders/PMs should be taking into account while executing.
The GCUR model presents a set of four core activities that fund managers (or HR partners, operations management and/or risk management heads) can leverage to help improve the processes of their teams to reach institutional quality, especially on the investment execution side.