www.benefitscanada.com/investments/alternative/article. -
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Published on: 7/18/2006
Last Visited: 7/1/2007
"The pursuit is actually deadly-it's very much a flawed theory," says Tom Gunn, former chief investment officer at OMERS and now president of the University of British Columbia Investment Management Trust in Vancouver.
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Different skills are needed for different alternative strategies, says Gunn."In real estate, it has to do with people's demonstrated ability to make transactions in the past.It's the same thing, ideally, in the private equity space," he says.
"Unlike public investing, the record of the manager is usually repeatable.That's because what you're investing in is a management skill rather than just a securities selection skill."The corporate skill, he says, "is buying an asset and figuring out how actually to improve the underlying value of that asset."
By contrast, hedge fund managers, most of whom were trained on the proprietary trading desks of the banks, seek out short-term mispricings, in very narrowlydefined strategies.The skill was really in the execution."Hedge fund managers should have a recognizable skill and should have a definable skill and be able to explain it," Gunn says.
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"This gets into the argument of how much capacity there is in the market," says Gunn.
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"When I joined the firm, OMERS had a fair representation in real estate at the time," says Tom Gunn, former chief investment officer at OMERS, and currently president of the University of British Columbia's Investment Management Trust.
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"We always did in the strategic sense," says Gunn.He also notes that the desire to diversify into alternatives is a good idea from an asset mix standpoint.The board should always be involved in the asset mix decisions, adds Gunn, because that's the primary decision that affects asset returns.
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"Unfortunately, when markets are frothy, it's tempting for people to think they can invest without building the necessary infrastructure," says Gunn."That almost inevitably comes home to haunt them when times become rough."
Building the infrastructure is no mean feat: it's not just a matter of looking at how returns were generated, though that is certainly a consideration.It also involves assessing the manager, looking at the business model, and setting out risk controls.
Gunn says that one of the hardest questions that gets asked on due diligence on any manager is just to look at their back office and at their system skills.The purpose is to see if they have invested in their accounting controls and proper due diligence of banking controls."If it's not there, or we can't find it, or people are reluctant to show it to us, we will go and deal elsewhere," he stresses.
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Boards can also turn to consultants for due diligence who, in turn, instead of selecting a direct investment, may choose from a proven list of funds-offunds, Gunn says.
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