Saturday, October 31, 2015
Strategy Rules - Applied to money management - think about the firm
I took some time out from reviewing investment research to read Strategy Rules - Five Timeless Lessons from Bill Gates, Andy Grove, and Steve Jobs by David Yoffie and Michael Cusumano. Gates, Grove, and Jobs do not seem to have much in common other than being in the technology areas and being wildly successful; however, I was intrigued by the possible link between these three. The authors suggest that they all followed five similar lessons. I actually found the lessons as useful for thinking about money management and hedge fund firms. These are some very useful business strategies for the development a fund. The five lessons are in bold with how I think about them for the development of a money management firm.
• Look Forward, Reason Back - Think about the goal and then what you need to do to achieve it. If you want to make a certain return above a benchmark, then work back and see what are the sized bets that have to be taken and what are the returns necessary for each of your active bets. If you want to grow assets, think about the size of the firm and what is necessary to get to that goal.
• Make Big Bets, Without Betting the Company - This is classic risk management. If you want to make sizable returns, you have to take big bets, but you cannot bet the ranch on any one of these trades.
• Build Platforms and Ecosystems—Not Just Products - This is very insightful for money management firms. Managers should not think about funds but the platform for return generation.The process is more important than the product. If you are delivering returns to clients, what is the delivery system for those returns.
• Exploit Leverage and Power—Play Judo and Sumo - If you are small, then exploit your size and be nimble. if you are large, use you power to gain scale and depth. Leverage the technology and skill you have against competitors who may not be able to adjust portfolios quickly.
• Shape the Organization around Your Personal Anchor - Some managers are better value guys. Others are better quants. Us the skills you have to create the firm strategy that is consistent with who you are.
The strategy for how the hedge fund is structured is as important as the trading that is conducted. The firm has to have a clear strategic identity.