I am not arguing for all due diligence to be
done within 45 minutes, but the basic principle is sound. If a manager cannot
explain what he does and his edge in 45 minutes, you should not invest. The
storytelling should include when the strategy will make money and when it will
underperform as well as any hidden or less obvious risks. A good story should
also explain why the investment should be held in a portfolio. If the manager
can explain this simply, then it is worth a deeper dive. There
is power with good storytelling that is often missing from marketing.
Weatherstone was also the father of VaR when he
asked analysts at JP Morgan to determine how to get a single end of day measure
of risk for the bank. His vision of getting condensed information on daily risk
was the driver for modern risk management. Of course, others may view his
desire for simplicity should make him the father of all financial crashes based
on poor risk analysis. Perhaps he was a parent to both.
A Weatherstone approach would reduce hedge fund
analysis to as few numbers as possible. While we know there are limitations,
our number one statistic is the return to risk ratio. It answers the simple
question whether you are being paid enough to take on a particular amount of
risk. Measures of downside which account for non-normality are even better, but
the basic statistic is still the same. Start with payment for risk and then
work deeper into the numbers.
Finally, Weatherstone was also known for having some
good quotes:
"If you're not confused, you don't understand the
business."
"I don't think you're wrong. I just disagree with
you."
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