Guidance Capital Management

Thorough Research

Guidance Capital’s central strength is hedge fund research. Our research process is thorough, sophisticated and constantly refreshed. The process revolves around evaluating managers against their strategy peers on 10 criteria. (See table below.) A methodical approach helps us avoid knowledge gaps and establish standards for comparison.

Criterion	Some of the Questions Addressed by Criterion
Validity of Strategy	Is there economic logic behind the strategy, or does it rely on investing "genius"?
Quality of Investment Process	Is there a well-defined investment process? Does the process involve confirmation of or challenges to investment theses? Are ideas documented?
Depth of Professional Resources	How impressive is the professional staff compared to competitors? Is staff inordinately dependent on one or two individuals?
Organizational Depth & Stability	Is the manager's organization stable and well-established? Are incentives aligned? Do manager affiliations hurt or help it?
Risk Profile	What kinds of risk does the manager take? What ranges for these risks does the manager observe? Does the risk profile fit the investment guidelines of the Guidance fund under consideration?
Risk Management	How does the manager measure and manage risks? Are tools state-of-the-art?
Historical Performance	Are returns consistent with the manager's target and risk profile? Can we understand the reasons for periods of manager out/under performance? Correlations and consistency? How does performance compare to benchmarks and peers?
Asset Capacity	How much and how fast can the manager grow without hurting return prospects?
Vehicle Quality	Are the fund fees, lock-up duration, and liquidity terms reasonable?
Client Service	What level of transparency is available? Are questions answered quickly, thoroughly? Are senior managers readily available for consultation?

We have, to start, access to purchased and proprietary hedge fund databases that cover several thousand hedge fund managers. Managers of interest for Guidance products enter an internal database we call Bench+. We assign each Bench+ manager a strategy category and rate the manager on a 1 to 5 scale to indicate our tentative level of interest. Summaries of research status give us a ready starting point to evaluate individual managers or entire strategy categories. Formal strategy category reviews, which we call Triage Reports, identify sub-sector managers of likely interest. Triage Reports require our analysts to refresh the Bench+ lists from prime broker universes, databases and other sources. The analyst typically draws a wide range of sources and distills summary information down to a paragraph or two on each manager for consideration by the Investment Committee. The Committee and the analyst in charge decide on those candidates that deserve deeper review.

Senior Professionals on the Front Line
Unlike some firms, Guidance has its most senior investment professionals – individuals who have experience running portfolios in institutional environments – meet with managers and traders. Experienced money managers know more about potential pitfalls and can ask better questions than can bright but less seasoned individuals. Senior professionals can better differentiate sound investment programs from superficial ones.

These investment professionals ultimately express their opinions on a manager in a detailed report to our five-person Investment Committee. The report provides a rating of the manager in question on each of the 10 criteria listed above and also compares those ratings to ratings given to other managers in the same category. Ratings are justified in writing at length.

Risk Analysis
Risk analysis receives special attention. We pay close attention to a wide range of risks and specifically identify how each manager treats five types:

Market exposure
Interest rate risk
Liquidity risk
Other Factor and Style risk
Non-investment risks, including operational risks.

To evaluate these and other areas we require a degree of transparency from every manager we use. We want enough transparency to answer several questions... Is the manager applying the same approach that earned our confidence initially? Are risks what we expect them to be? What would prompt concern? Do we have enough information to conduct an informed discussion with the manager about the portfolio?

Risk assessment extends to several other areas. We use a third-party risk analysis system produced by RiskData. The RiskData system allows us to assess a manager's sensitivity to a broad set of risk factors, both in normal and extreme market conditions. The system integrates both linear and non-linear analyses, and provides a framework for risk budgeting in portfolio construction. It also calculates a number of Value at Risk statistics that are used to evaluate individual managers and to construct the portfolios.

Research is never complete – there is always more to know about every manager. We have a monitoring system in place that assigns responsibility for each invested manager to a specific analyst. Invested managers also undergo a formal re-qualification review at least once a year. The re-qualification reports are prepared by a different analyst each year to broaden our institutional understanding of the manager and to add additional depth of understanding that a new perspective often brings.

We believe that Guidance Capital's research process is as thorough as that performed by any fund of funds operation. To date the firm has avoided notorious fund problems such as Amaranth, Bayou, Beacon Hill, and others. Avoiding mistakes is no mistake.

Guidance Capital does not provide investment advisory services to the public. Nothing herein should be construed as general advertisement of investment advisory services or a solicitation of prospective clients for investment advisory services. The information herein is intended solely to provide certain background information to guidance capital and its principals.