Risk Management and Operations:
5 Takeaways from Commonfund Forum 2019

May 17, 2019  | by Amy Harlacker, Dana Moreau, Brian Rondeau

Risk Management

The majority of investors’ attention is often focused on the performance of the funds or managers in their portfolio.  And rightfully so.  The numbers that appear on statements month after month will determine to a large extent whether an institution can continue to pursue its mission over an extended period of time. 

Small levels of underperformance, when compounded, become material in just a few years. Great time and effort should be committed to finding managers and partners who have proven the ability to consistently generate strong returns. But those monthly performance statements are not the only arbiters of success or failure in the investing sphere.  The areas of risk, legal and compliance, operations and information technology, to name a few, can all drive meaningful, tangible effects on investment outcomes.

Here are a few ideas to think about that were raised by the expert panel at Commonfund Forum 2019, “Risk Management and Operations: The Back Office Comes to the Front.”

1

Conflict. If there is one thing to focus on while looking at investment managers, it is conflict.  Are there any areas where the interests of the manager and the investor are not aligned?  Are there affiliated entities siphoning off fees?  Are there multiple fund vehicles running in parallel?  Which one do the fund’s principals invest in?  What is the allocation policy between them? Get comfortable with any potential conflict as a first step in assessing a manager.

2

Fees. Look at audited financial statements, not sales presentations, to determine the true level of fees that an investment manager is charging you.  Many investment firms will trumpet their low management fee while passing virtually every expense they have through their investment vehicles.  A large difference between gross and net performance can be a red flag.

3

Back Office.  Established managers aren’t necessarily good managers when it comes to the back office.  We have seen plenty of successful investment managers rest on their laurels after achieving early success.  The push to spend valuable resources on supporting a best-in-class back office can take a back seat when fundraising is robust.  If investors don’t demand safeguards, independence and oversight, they won’t appear.  Once a fund or vehicle becomes capacity constrained, the investor has lost much of the leverage to force improvement.

4

Cybersecurity. One of the biggest risks that investment managers face these days is cybersecurity.   Firms that handle large sums of money are always going to be a target and the threat landscape is always evolving.  Each manager’s commitment to cybersecurity (through quality of staff, allocation of resources, etc.) is different.  Assessing that level of commitment is essential to protecting your investment.  If you aren’t equipped to do so, find an expert to help you.

5

Ongoing diligence. Lastly, do not let the day you sign the docs be the last contact you have with a manager.  This business is about relationships and the relationship between manager and investor is one that requires attention.  Be aware of what is going on with the manager in areas other than just performance.  Have there been personnel changes?  Regulatory inquiries? Service-provider changes?  The more informed you are as an investor the better equipped you will be to handle a new piece of information that comes your way or compare the new, shiny manager with the one you’ve been in regular contact with.

Authors

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Dana Moreau has firm-wide oversight and responsibility for risk management, investor services, information technology, operations, and human resources. Prior to becoming COO, Dana was Chief Risk Officer of Commonfund.  Previously, Dana was with Commonfund’s Hedge Fund Strategies Group sharing responsibility for portfolio analysis, manager identification, due diligence, and investment monitoring.  His primary focus during this time was on portfolio construction, risk management and the operational oversight of the funds. As a member of the Hedge Fund Strategies Group he led the effort to implement a research management system and oversaw the onboarding of an external risk engine, each of which are now utilized firm-wide. Prior to joining Commonfund, Dana worked at State Street Bank & Trust where his primary responsibilities were portfolio accounting and administration for the bank’s hedge fund clients. He has a B.A. in Economics from Assumption College and an M.B.A. from Columbia University.
Dana J. Moreau
Chief Operating Officer
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Brian Rondeau is a member of the Risk Management team and is responsible for the due diligence process of external managers, vendor risk and counterparty credit risk. Prior to joining Commonfund, he was Vice President – Risk at Harvard Management Company where he led a team responsible for counterparty credit risk as well as investment risk on Harvard’s illiquid asset class portfolios. In addition, Brian was involved in liquidity risk management, managing HMC’s banking relationships and analysis related to sustainable investing at Harvard. Prior to Harvard, he spent four years with RBS Greenwich Capital in risk roles analyzing financial institutions and the asset-backed finance business. Brian is a Chartered Financial Analyst and member of the CFA Society Stamford. He earned a B.A. from Columbia University.
Brian Rondeau
Managing Director, CFA
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Amy Harlacker heads the Investor Services team and is focused on providing operational leadership and direction and manages the implementation of the organization’s strategic plans and initiatives. Previously Amy led the team responsible for delivering full middle office operational support and service to Strategic Solutions clients. Amy has also held a series of analytical roles within the Commonfund organization across the Operations, Client Service and Information Technology groups. Prior to joining Commonfund, Amy was a business analyst at Energy East Corporation. Amy holds an M.B.A. from Rensselaer Polytechnic Institute and a B.S. in Civil Engineering from Lehigh University.
Amy Harlacker
Managing Director
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Information, opinions, or commentary concerning the financial markets, economic conditions, or other topical subject matter are prepared, written, or created prior to printing and do not reflect current, up-to-date, market or economic conditions. Commonfund disclaims any responsibility to update such information, opinions, or commentary. To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated in this material. Forecasts of experts inevitably differ. Views attributed to third parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Managers who may or may not subscribe to the views expressed in this material make investment decisions for funds maintained by Commonfund or its affiliates. The views presented in this material may not be relied upon as an indication of trading intent on behalf of any Commonfund fund, or of any Commonfund manager. Market and investment views of third parties presented in this material do not necessarily reflect the views of Commonfund and Commonfund disclaims any responsibility to present its views on the subjects covered in statements by third parties. Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Commonfund fund. Such statements are also not intended as recommendations by any Commonfund entity or employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information. Past performance is not indicative of future results. For more information please refer to Important Disclosures.

Disclaimer

Information, opinions, or commentary concerning the financial markets, economic conditions, or other topical subject matter are prepared, written, or created prior to printing and do not reflect current, up-to-date, market or economic conditions. Commonfund disclaims any responsibility to update such information, opinions, or commentary. To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated in this material. Forecasts of experts inevitably differ. Views attributed to third parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Managers who may or may not subscribe to the views expressed in this material make investment decisions for funds maintained by Commonfund or its affiliates. The views presented in this material may not be relied upon as an indication of trading intent on behalf of any Commonfund fund, or of any Commonfund manager. Market and investment views of third parties presented in this material do not necessarily reflect the views of Commonfund and Commonfund disclaims any responsibility to present its views on the subjects covered in statements by third parties. Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Commonfund fund. Such statements are also not intended as recommendations by any Commonfund entity or employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information. Past performance is not indicative of future results. For more information please refer to Important Disclosures.