My last post asserted that successful hedge fund managers have an exceptional ability to manage in an environment characterized by ambiguity and complexity. This ability emanates from their use of effective cognitive strategies (ways of thinking). I introduced the CPRI (Context, Process, Results, Implications) framework, and recommended screening hedge fund managers based on how well they address each of these four elements when describing decisions they have made.
This post will:
Illustrate ambiguity and complexity in a hedge fund environment
Demonstrate how an effective manager reduces ambiguity by first analyzing the context (C) before moving to effective action
Before proceeding, I would like to acknowledge the many readers who commented that the ability to deal constructively with ambiguity and complexity is just as crucial for managerial success outside the hedge fund industry.
Ambiguity and Complexity in a Hedge-Fund Environment
Transactions are at the core of business. They typically start with a request. Requests are ambiguous; they have both explicit and implicit components to them.
Imagine a hedge fund serving institutional investors. Suppose a customer says, “I would like to invest another $100M with you.” The explicit request is both ambiguous and complex. There are countless ways the money could be invested (e.g. stocks, bonds, or other asset classes). Even if they had said, “I would like this invested in US equities,” there are nearly 3,000 listed on the NYSE alone.
The implicit aspects of this request are also ambiguous. Does the customer want to:
Quickly make up for losses on another investment?
Avoid losses of a certain size?
Satisfy some other agenda?
Given this uncertainty, what’s the best way to proceed?
Reducing Ambiguity by Analyzing Context (C)
The CPRI framework suggests that the first step in an effective strategy for dealing with ambiguity is to clarify the context.
To do this, managers can ask relevant contextual questions. The most powerful of these relate to goals.
Questions on which the manager might reflect include:
Who is this customer?
What are the customer’s goals, interests, underlying emotional concerns?
What are my firm’s values, mission, goals?
Are there other relevant stakeholders (e.g. regulatory agencies, other customers)?
Questions to ask the customer include:
Can you tell me more about what led to your decision to invest another $100M with us?
What does this represent as a fraction of your institution’s total portfolio?
How is the other portion invested?
What are you hoping to accomplish with this portion?
What is your time horizon?
If, at some point, your investment was down by 10%, what would happen?
By first clarifying the context, the manager produces information that reduces the ambiguity. The next step will be to use this information to guide development of an effective course of action (in this case, an investment strategy and the tactics for implementing it).
In the CPRI framework, developing and implementing a course of action is represented as Process (P). The process must produce results (R) that integrate the goals of all of the stakeholders identified by the manager during the analysis of the context (C).
Future posts will address designing processes (P), assessing results (R), and teasing out implications (I).
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Originally posted by Paul Edelman on LinkedIn on August 27, 2018.