Consultant “Evaluation Framework”
- People: Who are you?
- Performance: What are your returns?
- Philosophy: What gives you an edge, or alpha?
- Process: How do you implement your philosophy?
- Portfolio (optional): Does your portfolio reflect your philosophy and process?
Investment Management as a Factory
Focusing on the investment process to control business risk
If investment management is a factory, then the investment process is its production line. A good investment process is a Deming Process, where all the parts move together in a well choreographed dance.
But it’s also a business… our work focused on implementation steps (2-4) to control business risk:
- Alpha generation: What do you buy and sell?
- Portfolio construction: How much do you buy and sell?
- Trading: Optimizing trading costs.
- Review & control: Did all the components of the investment process work as advertised and as a team?
Secrets you never learned in business school
1. Reading your client: What is your actual benchmark?
- Stated benchmark?
- Median or average competitor?
- Cash, or absolute return?
- Blend of above?
2. Controlling your bets: The object of portfolio construction:
- Distill and control your intended bets (Macro factor, sector, individual position, e.g. Nortel problem in 1999)
- Eliminate or minimize your unintended bets
Reverse Engineering Competitors
Positioning vs. competitors to control business risk
Can be done on either a single portfolio or an “average competitor” composite.What we need:
Trading: Not an afterthought
Letting the trading desk shine
No one-size-fits-all solution:
1. Cost of trading: Focus on the sum of the components
- Commission: Most visible, but often the lowest cost component
- Impact: The price of crossing the bid-ask spread (VWAP benchmark)
- Opportunity: The cost of incomplete trades
2. Execution alpha: Timing your trades
- The reason for trading (trading with or without information, e.g. alpha from earnings report vs. portfolio re-balancing)
- The price of chasing overbought or oversold stocks
Execution Alpha: An example
The effects of price momentum on execution timing
When the market is rising, price momentum outperforms
- Positive returns in up markets
- Negative returns in down markets
- Timing the momentum factor: How do you identify up and down markets?
Review and Control
Did all parts of the process work as advertised?
- Investment model diagnostics
- Portfolio attribution analysis
- Portfolio implementation shortfall analysis
- Integration: Did all components work together as a team?
Sometimes the greatest learning, or scar tissue, comes from negative performance.
Equity quantitative analyst since 1985
- CIBC World Markets, quantitative and special situations analyst (1985-1990)
- Batterymarch Canada, quantitative Canadian equity PM (1990-1994)
- Batterymarch Financial Management, quantitative global equity PM (1994-2000)
- Graham Capital Management, long/short equity hedge fund PM (2001-2003)
- Merrill Lynch, technical research analyst on Institutional Invest ranked team, successor to Bob Farrell (2004-2007)
- Consultant to hedge funds (2007-present)
- Qwest Investment Management Corp., (2009-2014)
- Blogs as Humble Student of the Markets
Broad range of experience
- Global markets (Canada, US, international, emerging markets)
- Wide product experience (Institutional, mutual funds, global natural resources)
- Bottom up stock selection, top down asset, country, sector selection
- Risk control and portfolio construction
- Trading cost optimization
- Product engineering, client service and marketing