Investment and Research Process

In this video, I compare the investment process and the research process for a hedge fund.  I will provide you with some ideas for how to improve or change your investment and research processes while making sure that you do not distress your investors by making drastic changes to your fund.


Video Transcript/SummaryThe strategies and tips provided within this video module include:

  1. Institutional investors may become concerned by funds that drastically change their investment process from time to time.
  2. Almost everyone tweaks their investment process over time, but changing your theory can be worrying to investors.
  3. Having a three-step research process is important but often overlooked by funds.
  4. Think about your processes as a system that is constantly improved and updated.  

Transcript for Investment and Research Process

Hello, this is Richard Wilson and today we’re going to talk about the importance of an investment process and your investment research process, how those two go together, how you can be more institutional in communicating both to your investment process and your research process and how both of those things can be continually improved without damaging the consistency of your track record.

So first of, institutional investors as well as investors in general are always a little bit concerned about investment processes that greatly change over time because they might see the performance in your portfolio directly connected to one piece of your investment process but that’s not the same as what you did during the first half of your track record. They might just throw away that track record and start where your new investment process started because that is really irrelevant performance. So it’s very important to remember, if you’re going to change your investment process make sure you keep the core components in place because it really will change how you’re producing your returns, what risk you’re taking probably and that will really change the perspective that investors have on your long-term track record when it eventually gets longer.

One thing to remember is that almost everybody tweaks their investment process constantly, most hedge funds I know every — you know 1 to 3 years are changing little components of their investment process. That’s totally normal adding new risk management tools especially it’s something that’s commonly done. What’s different though is if you change your theory or if you change the main process or you take out 30% or 40% of the process. That is a major change and probably it should not be done unless it’s starting a new fund or it’s some drastic situation where you have no choice.

The difference between that and the investment research process is that many times when you bring in a research component there may be a 3 or 4-step process that your fund uses, which can be really helpful to document within your marketing materials, maybe there is the input stage where all of the research from infinite consulting firms, from some technology report or platform you have access to, from a fundamental research you may do, from trending site, from maybe global macro-type research, all of those inputs come in and then maybe there is a report that’s made or maybe there’s some sort of synthesis step, then after that maybe there’s a refining and then further synthesis step and then the research is actually put to use and applied to make any investments.

So having that, the 3-step research process which is very defined in who’s doing what and when and why is important and I think that lots of people skip that step and they don’t explain it exactly how they use the research and when and what inputs they have into that research process. And what’s important to know is that lots of times that research process will stay exactly the same, maybe you’ll have someone else helping with it and so it will be able but more robust but those 3 or 4 steps will remain the same, but those inputs maybe always changing, maybe always improving those inputs, changing how the information is received from manual to automatic, changing the level of information you receive, adding new inputs.

And so it’s important to think about it as a system and having these major components of the system very stable and steady and robust where the inputs to the system are always being improved, you’re always casting out new inputs and making sure that you’re getting the best information possible. So some of the best institutional quality funds I have seen do that are constantly refining their inputs and improving them.

So that’s the short talk I wanted to give on investment research versus investment process, how changes can affect the perception of your firm as being institutional quality or not and some ideas on like what can be changed and maybe cannot be changed without setting off some red flags on the investor point of view. So thank you for your time here and we’ll see you again soon.

I hope that this video has provided you with some insight on the investment and research processes.

Your friends here at http://FinanceTraining.com

About Richard Wilson