Protégé Partners LLC is a fund of funds with a long term oriented approach and several billion dollars under management.
The name might ring a bell for some readers as the firm made a 10 year bet with Warren Buffett. Buffett bet the firm that an S&P 500 index fund did better than the average return booked by five funds of hedge funds picked by Protégé Partners LLC. Right now Buffett is winning that bet.
In a recent White Paper, Protege's co-CIO discussed asset allocation, below is a summary:
Our approach over the last ten years has been to set sensible policy targets across the strategies that fit our investment philosophy, stay true to specified bounds around those targets, focus on manager selection to drive returns, and make modest, conscious deviations from our policy portfolio when markets unearth unusually compelling tactical opportunities. We set wide
enough bands around our policy targets to try to be generally right, not precisely wrong. Our active rebalancing occurs at the manager level, where we attempt to hold our behavioral biases in check by trimming from recent outperformers and adding to recent underperformers, so long as our conviction and thesis for investing with the manager experiencing a rough patch still holds.
An investor who is more aggressive in shifting around capital will eventually have an exciting story to tell, but if measured comprehensively is unlikely to add value through strategic tilts over time. It behooves those in the shoes of assessing allocator performance to insist on seeing data that manifests added value from policy target deviations before getting seduced by anecdotal evidence.
Successful hedge fund investing relies on finding the best managers that create
competitive advantages in their areas of expertise and deliver returns above their peers. Over time, the specific performance of a talented manager is far more important to returns than the performance of its broad strategy. For those thirsty to juice returns by getting cute, I strongly suggest they heed the call to “don’t just do something, sit there!”