With the last episode of US-China propaganda, it became almost impossible to follow the fate of Wechat in the US. It turns out that a California judge suspended the Trump’s earlier order for Apple and Google to remove Wechat, which is owned by Tencent, from their app stores last Sunday 20th September, considering that the ban would violate the “First Amendment Protected Freedom of Speech”, especially for American Chinese.
Let’s put some context of me mentioning Wechat here. To understand a China-based fund manager’s culture, Wechat is actually an essential tool of assessment. I remember my experience of attending a flagship hedge fund conference last year organized by one of the biggest Wall Street Prime Broker in Tokyo. As soon as I walked into a conference room of a Chinese billion dollar long-short equity manager, one of the first questions after being introduced to the fund manager, was to be asked to connect on Wechat by the QR code recognition (in Mandarin). I was quite amazed by this request. As an overseas Chinese living in Europe for almost 20 years, for some time I only used Wechat for personal purpose, but I realized very quickly that Wechat already became an important part of doing business with Chinese partners. During the conference, I exchanged a great deal of information with various Chinese fund managers on Wechat including making business appointments.
In reality, Wechat is more than a tool for chatting with friends, families or Epayment. It penetrates deeply into the lives of Chinese people inside and outside of China, especially when the boundaries of the personal and business lives are quite blurred in the Chinese culture as opposed to the Western practices. Over the last two years, I used Wechat for investment due diligence meetings with fund managers in Hong Kong as well as received the “good luck” red pocket money from my parents during the Chinese New Year. Many Western businessmen and companies also start to use Wechat to develop businesses in China.
Beyond the cultural reference of doing business with Chinese companies or Chinese fund managers on Wechat, the above anecdote reveals the critical part of “cultural assessment” of a manager for a selective capital allocator with a holistic institutionalized approach.
I am sure that my fund selector peers would agree with me that the performance is not the only measurement of a fund’s success or KIP for capital raising, but a combination of the pedigree, the people, the process being involved and ultimately the culture are all integrated parts of the manager selection considerations.
The first three parts are tangible elements which could be assessed through objective data and Q&A during the traditional due diligence meetings, but how to assess a fund manager’s culture? There is still evidenced-based information available for assessing a fund manager’s culture, such as the key investment staff turnovers, team’s compensations, and long-term alignment of interest etc.
The deep-dive methods for assessing a fund manager’s culture could be involved of more subtle aspects such as spending time at the fund manager’s premises to observe the investment team’s dynamics between the key decision maker and the supporting analysts at their investment committee and the “informal” reference checks with industry contacts and existing clients.
Last but not least, the ability and the efforts put into place to understand the culture of a fund manager are also extremely important. This allows the fund selector to distinguish a winning fund manager over the long run with a repeatable process from those whose short-lived good performance is only a matter of “luck”. That’s why the fund selection process can not yet be totally replaced by a robot or AI based approach by merely looking at 3 year and 5 year risk-adjusted returns.
I am proud to say that the manager research process on active managers still involves a huge amount of human intelligence and judgement based on quantitative and qualitative considerations, at least for those experienced and institutionalized capital allocators who understand the necessity to understand a manager’s behaviours, and will take steps to develop the conviction to stick with him/her at good and bad times.