Author: Chris

By Lydia Tomkiw September 30, 2020

“Hedge fund allocators are faced with navigating many currents at once, including a low-interest rate environment that could give hedge funds a boost for the foreseeable future, says Chris Cutler, president of Manager Analysis Services.

“On the one hand, several prominent hedge fund managers have disappointed investors this year. We have seen more allocators finally making redemptions from those managers,” he says in an email to FundFire. “On the other hand, exceptionally poor return prospects for future investments in fixed income strategies is causing allocators to search harder for portfolio stabilizers, including among hedge fund strategies and certain private credit strategies that have low correlations to equity markets.”

Lisa Phu September 29, 2020 FundFire

“Generally when institutional investors allocate capital, they want to invest in various asset classes and typically have a variety of managers”, says Tom Donahoe, Principal and Practice Leader for Governance and OCIO Search at Manager Analysis Services LLC. For example, investors may have an allocation of 8% to particular asset class, e.g. hedge funds, but typically don’t allocate 10% or even 5% to a single hedge fund manager” he says. “Large institutional investors usually allocate to a number of managers in an asset class to protect against the risk of picking a poor manager. Sometimes a certain portion of the portfolio will be dedicated to passive investing. Diversification in asset allocation is key to long-term returns.”

Donahoe says “the thing that’s surprising is that they chose to allocate 5 or 6% of their strategy to a single volatility-based investment, and to do it solely with a single manager. Whether an institutional investor relies solely on an in-house staff, an independent investment consultant, or OCIO, the investor should have strong governance.” Donahoe says “institutional investors should have an investment policy statement specifying permitted asset categories, acceptable ranges, and prohibitions against over concentration. Also they have to perform the appropriate amount of due diligence that corresponds to the type of asset class they are investing in. Going long using US Treasury‘s will require dramatically less diligence compared to more complicated strategies.”

He explained that the Allianz GI Structured Alpha products are a complicated strategy containing a number of sub strategies that are occurring within the strategy. Donahoe says “the primary component of the strategy was buying and selling a portfolio of option contracts. Was that truly understood by the people who were buying it? The investment strategy should’ve been categorized as a high risk, short options strategy focused on net short volatility. This strategy appeared to be part of an alternative allocation.”

“My interpretation is that there was confusion on the part of the pension plans that this was an equity allocation,” says Christopher Cutler, Founder of Manager Analysis Services LLC. “They thought they were invested in an equity program, when in fact they were investing in equity plus a huge amount of volatility in the marketplace, and they were massively exposed to a market shock.”

By Lydia Tomkiw June 24, 2020

“While some investors are indeed rotating their allocations now, investing in a new manager is ‘the hard part right now,’” says Chris Cutler, president of Manager Analysis Services. Doing due diligence on a well-known industry name is very different from looking at a new fund, he adds.

“It doesn’t mean it can’t be done,” he says. “People have to take a leap of faith to make those allocations, and they have to revisit how they conduct due diligence, and there will be compromises if they really want to do it.”

And depending on the manager and opportunities in the market, it is something investors may decide to do.

“People were struggling with their hedge fund allocations for a little while… this coronavirus experience has reinforced the view they should be in hedge funds. It has been a relief for the hedge fund community from a business perspective,” Cutler says.

By Aziza Kasumov April 29, 2020

“The best practice is to reach out as much as you possibly can in terms of communication,” says Chris Cutler, founder and president of Manager Analysis Services.

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Overall, Cutler says, the results he’s seen from the consulting community have been much better than in past downturns and market crises.

“We are mostly seeing performance in line with what we would expect among larger consulting firms’ portfolios,” notes Cutler. The absence of “widespread severe surprises,” he adds, is a significant improvement from the experience during the great recession of 2008, in the lead up to which many consultants had been piling into strategies they did not understand.

Jumping into strategies they don’t fully grasp could still be a problem among some consultants, especially when it comes to volatility-selling and structured credit strategies, Cutler says. But most firms have become “more thoughtful.”

By Aziza Kasumov April 3, 2020

“Having a key person depart in the middle of a market crisis is a tremendous red flag,” says Chris Cutler, founder of Manager Analysis Services. “Clients moving to OCIO solutions often believe they are relieving internal management burdens, yet at times they unknowingly incur governance challenges of the OCIO firms they select,” he adds.

The firm had not previously recommended Edgehill to clients, Cutler notes.

Setting up an advisory relationship with an executive who’s stepping away “is a relatively common tool to try to mitigate the disruption and loss of focus that damages both a firm and its clients,” Cutler remarks.

By Lydia Tomkiw March 4, 2020

“There is a need for more capacity in the space, especially with many quant funds closed and a desire for strategies that produce uncorrelated alpha,” says Chris Cutler, president of Manager Analysis Services.

“I think [Investcorp and HC Technologies] are smart to try,” he says. “If they can attract enough talent and resources, they will probably succeed in the long run.”

By Mark Myers

Hedge funds are supposed to protect your investment portfolio against the risk of market downturns. But given the secretive nature of these lightly regulated private investment partnerships and the recent spate of hedge-fund failures, your biggest risk may actually be the hedge fund managers themselves.

Consider this: About one in three new hedge funds are likely to go belly up within three years of opening for business because their managers lack the skills and stamina necessary to attract and manage assets. Even seasoned hedge-fund managers can jeopardize shareholder assets by cutting corners or going too far out on a limb to achieve and sustain higher returns. And then there’s Bayou Management and Wood River Capital Management, whose fund managers were recently accused by the government of fraud and misleading investors.

To avoid being burned, more individual investors are hiring special hedge-fund investigators to verify and monitor the backgrounds, skills, and performance of hedge-fund managers.

Skeletons in the closet

Most affluent investors choose hedge funds based on the say-so of wealth advisors, colleagues or friends. But such recommendations can be dangerous since most of these fund advocates have conflicts of interest and the field is largely unregulated by government agencies. Some investors try to research hedge funds on their own, but most lack the forensic training to drill down far enough or identify the biggest problems.

Hiring a team of hedge-fund investigators can make this task easier and more productive. An investigative team is usually made up of a fraud investigator who performs in-depth background checks, a manager analyst who assesses the outlook for the hedge fund’s strategy, a lawyer who specializes in hedge-fund offering documents, and an accountant who has conducted hedge-fund audits.

The fee for a team investigation is relatively low, ranging from $5,000 to $10,000,
depending on the assignment. Results are commonly available within weeks, and many investors retain investigators to monitor their hedge funds on an ongoing basis.

Skills that fall short

In addition to personal background checks, investigators evaluate the skill sets of hedge-fund managers. “Clients need to know whether a manager is professionally qualified to handle the sophisticated strategies promoted in the marketing materials,” says Chris Cutler, president of Manager Analysis Services, a New York firm that evaluates manager abilities and fund operations.

Last year 35% of the funds that MAS investigated were run by managers who lacked sufficient training for the investment strategies they were using. Other funds scored low operational marks for charging excessive fees, imposing unfavorable lockup provisions, and failing to cooperate with MAS on valuation issues. Of the funds reviewed, 15% ranked as strong investment candidates.

To assess a hedge fund’s operations, MAS looks at its trading strategy, how much risk the manager assumes to achieve returns, and key aspects of the fund’s infrastructure. These factors include the quality of third-party valuations, audited fund statements, and whether administrators check to see that all expenses paid are permitted, and that there are no hidden fees within the fund structure.

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By Robert Lenzner

In 2006, the UBS feeder funds to Madoff hired consultant Chris Cutler [President, Manager Analysis Services] to do probably what was the first due diligence on Madoff’s operation since 1985, when the feeder funds first invested with Madoff. It took Cutler only four days to discover the smoking gun: the options volume that Madoff reported as executed by the feeder funds exceeded by far the total volume of puts and calls actually traded in those securities on the Chicago Board of Options Exchange.

In other words, these put and call executions could never have happened. There was not enough volume of trading to have fulfilled orders just from these two accounts – not to speak of all the other Madoff directed investment accounts.

…All of these revelations are included in the complaint filed last week in U.S. Bankruptcy Court by the Securities Investor Protection Corporation and its appointed trustee, Irving Picard of the law firm Baker and Hostetler, against Bernard L. Madoff Investment Securities LLC.

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