- Aberdeen Asset Management
- U.S. Institutional Investments
- Aberdeen Solutions
- Our Process
Fund of hedge funds
Our investment process includes three key disciplines, manager selection, portfolio construction and on-going monitoring, although in practice they form a continuum and are not compartmentalized. The process aims to deliver high-quality, long-term performance with risk exposures and market sensitivities that are appropriate to the investment objective of the relevant portfolio.
Manager Selection
Our manager selection process consists of a comprehensive range of investment and operational due diligence. When we select managers, the investment team analyzes several key areas including:
- investment process;
- risk management;
- business stability;
- quality of the team;
- infrastructure; and
- long term track record.
The investment team also undertakes two further key sets of analyzes:
- a quantitative assessment using hedge fund specific, proprietary methodologies to analyze performance, risk, tail properties, factor exposures, and diversification implications; and
- a more qualitative assessment focused on the investment risk process, people, and platform at the hedge fund manager. This process generally involves separate interviews with the key people involved in portfolio construction and investment risk management at the manager.
In addition to the investment analysis, to seek to minimize downside valuation , operational and fiduciary risks, our independent Operational Due Diligence team analyzes several key areas including:
- a review of a fund’s offering documents, key terms and good standing in its local jurisdiction;
- robustness and independence of reconciliation and valuation;
- Corporate governance effectiveness at the fund; and a review of operational controls and independence at the manager and its regulatory good standing.
Fundamentally, our selection process is designed to assess whether a manager has a robust and repeatable, strong investment process and an effective operational infrastructure. The process leads to allocating an Investment Proposition score and a Conviction Rating to each manager as they move through the various levels to become an approved investment that can be included in a portfolio.
Portfolio Construction
The portfolio construction process begins with asset allocation to strategies which achieve a balance of delivering the expected return/risk profile over the long term (Strategic Asset Allocation “SAA”) and the best opportunities over the short term (Tactical Asset Allocation “TAA”). Proprietary assessment of forward looking return/risk, diversification, clustering, and factor exposures are conducted using our Strategic Portfolio Analysis and Construction Environment (“SPACE”) and optimized to each portfolio's objectives. We believe our role as an allocator is to understand, measure, and manage risk; and this belief is reflected in the SAA and TAA process. In measuring risk, our proprietary Portfolio Decomposition System (“PDS”) includes a number of aspects:
- distributional properties such as VaR and fat-tail risk incorporating non linearity and higher moments;
- portfolio risk decomposition along managers and strategies;
- historical simulation and stress testing;
The SAA and TAA approach to portfolio construction is applied uniformly to our entire client offering, whether it is a customized portfolio or one of our flagship products.
On-going Monitoring
Managers are monitored closely after investment, with formal quarterly reviews and a minimum of annual on-site visits. We also undertake informal reviews for on-going risk and strategy updates more frequently. Additionally, there is an on-going annual review process of manager’s operational controls administrators. Our on-going due diligence process, allows us to deepen our understanding of the evolution of each manager’s business, and to assess the on-going application of their investment philosophy, risk controls and strength of operational infrastructure.
Reports of these and other factors are presented to and considered by Aberdeen’s Hedge Fund Investment Committee. The Hedge Fund Investment Committee meets through a regular series of three distinct meetings held monthly:
- Investment review and perspective;
- report and outlook; and
- Portfolio construction and implementation.
Inputs to these meetings include, inter alia, individual fund reviews for each invested fund, strategy reviews on each desk, as well as SAA and TAA, and risk reports describing the composition of the portfolios and their returns.
This Investment Committee comprises the Global Head of Hedge Funds, Head of Alternative Operations, Head of Portfolio Construction and Quantitative Strategies, the senior members of the investment team and the Head of Alternative Operations.