Symptoms of poor portfolio management systems
When it comes to turning performance around, a good PMS is the lowest hanging fruit. In 2005, I joined a hedge fund whose PMS was so ugly, looking at it could have caused brain damage. I promptly tooled it up, at least to get rid of the health hazard. Suddenly, problem children lit up like garlands on a Christmas tree. Volatile penny stocks on the short side, lazy dogs, and unappreciated racing hounds were all swiftly dealt with. Volatility came down. Performance was more consistent. The Sharpe ratio jumped. Investors noticed. Assets Under Management (AUM) grew. It was that simple.
Everyone wants to know the "secret sauce" of the winners, but this is one area where the lessons of the "alpha-challenged" ones might help us from inadvertently repeating the same mistakes. Here is a simple exercise that will help you figure out if your system is in need of an upgrade. Deficient PMSes share one or more of the following...
