Opening up the world of alternative investments to a wider swath of investors is exciting.
This is a space where a home run can mean huge returns. Individual investors now have the opportunity to allocate capital like the most sophisticated institutions. But often we see main street investors paired with the riskiest deals that have little oversight once their money is deployed.
Investing in alternative assets, like a venture capital fund, is a little more complex than just buying a stock or even a mutual fund. Picking winning companies is only half of what good fund managers do. They spend as much — or more — time nurturing these investments to ensure they’re successful.
That’s why picking actively managed funds — and, by extension, the fund manager — are so critical in this arena. Passive SPVs and rolling funds may provide access to interesting deals but they are by nature less engaged in ensuring the underlying investments are successful once the capital is deployed.
These kinds of investment vehicles can easily make money just on the management fees, but lose nothing when the underlying investments fail. You may want to pause a bit when you see these opportunities announced with rocket sign emojis. Fund managers should be key advisors to the companies they invest in, providing expertise and value to help everyone come out a winner.
The selection component of a manager’s job isn’t easy, either. Consider for a moment the difference in the options available between the more efficient public markets — where data on every company is readily available — and opaque private markets. Mutual funds may have to pick from a few thousand securities while the options available to venture capitalists is the universe of a half-million private companies.
Skill matters here and it’s easy to make a misstep. Manager dispersion bears this out, showing that the difference between top and bottom-quartile managers is more than 7.5 times greater in private markets. Top managers in private equity beat even the average manager by two times.
How We Pick Managers
Managing a fund is difficult work that requires real skill. How do you avoid the duds and pick one that maximizes your return? Gridline takes this job seriously, performing extensive due diligence on every fund we invest in and offer to our users. We’ve broken down our process into four principles, the four Ps.
- Performance: We want managers who can beat the public markets, which is why our quantitative screening tools start with analyzing performance to Public Market Equivalents and compare fund performance to a customized peer group of funds with similar investment styles.
- People: Picking a fund manager is a lot like hiring. You want A players with unique analytical talent who can anticipate market movements and exhibit strong portfolio management skills.
- Process: Sound investment processes are repeatable and can help ferret out managers who got lucky from those with a high level of skill. We look for well-documented processes from sourcing to exiting, with clear decision making based on individual accountability. We seek to understand how a manager’s process and guidelines add value to the overall process and keep the emotional aspects of investing in check.
- Philosophy: We don’t want managers distracted by short-term noise or near-term results. The best managers have long-term horizon strategies. They’re intellectually curious, constantly searching and partnering with proven external resources to gain the diversity of thought, deep conviction, and accountability they need to be successful.
Everything we do at Gridline is focused on maximizing returns for our members. This includes our selection process, which ensures you have access to managers who can pick sound investments and actively manage those companies to produce returns that beat the public markets.