Culture: Hiding in plain sight – Part three

Lawrence Davis | Senior Analyst
7 min read
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Although a subjective concept, culture hides in plain sight and is readily observable if you know how to look. In a series of short pieces, Lawrence Davis, an Analyst on Aurum Research’s Operational Due Diligence team, explains the importance of a hedge fund manager’s culture to investors, the problems in defining and quantifying it, and how we overcome these problems to interpret it during due diligence.

Part 3: Employees and investors

In Part 1 of this series, we introduced the concept of examining culture when performing due diligence on hedge funds, and looked at the challenges of defining and observing it. Part 2 demonstrated how particular types of culture can be interpreted through a manager’s governance and compliance frameworks. In Part 3, we consider how culture is shown through a firm’s approach to its employees and fund investors.


A prime example underpinning the irrelevance of “one size fits all” is a firm’s approach to its employees. Clearly there are some HR-related policies that all firms must have, regardless of their size or type, but there are others that characterise a manager’s culture in a certain way. These are not necessarily right or wrong and depend on how the principals want to run their business.


An immediate red flag for some investors may be the rate at which employees join and leave a hedge fund. Significant turnover could imply either a poor hiring policy that fails to root out unsuitable candidates until after they’ve been employed, or a disagreeable working environment. Of course, this must be a consideration. However, high turnover may be a natural product of an intended culture that does not suit everyone, but is deliberately enforced to bring about desired results.

For example, a hedge fund’s culture may be designed to encourage brutal honesty and challenge, facilitating honest criticism of ideas to find the best solution to a problem. However, this may be seen by some as overly aggressive or combative. Culture may also be so anchored around risk management (a topic we explore in further detail in the fourth part of this series), that a PM’s negative performance below a trigger point will automatically result in termination of employment. These types of cultures are not necessarily right or wrong, but they are fostered by some managers to bring out the best in certain types of people and produce sustainable performance.

More generally speaking, employee turnover is not necessarily bad for a business: new staff can bring in new ideas and different ways of working. Indeed, a company with low or zero turnover may struggle to innovate or may simply be ineffective at cutting underperforming staff to the detriment of investors. Whilst, on the one hand, low turnover is beneficial for stability, it could be indicative of comfort or even fear of change. This makes it more likely that a business will fall victim to its own inability to shake things up. Employee turnover is firm-dependent, but it shows us what to expect and means we can identify cultural shifts if a particular pattern changes.


As we explained in part two of this series, the principals can contribute to employee empowerment by structuring committees with representation from a broad cross-section of staff, and delegating authority down the hierarchy to local teams. This comes down to control and trust, and the extent to which principals are willing to dilute the former and feel comfortable offering the latter.

Another key way that hedge funds can empower employees, and also retain a degree of consistency across the higher levels of the business, is through internal investment, namely equity programmes, bonus deferrals and fund co-investments. We consider that equity is one of the best motivators as it gives employees a tangible stake in the business they work for, and increases the likelihood of longer-term thinking. We have observed smaller, start-up managers giving away a portion of the company to early senior employees who are taking a risk by joining a new business. As firms start to mature it is very common for a portion of employee bonuses to be deferred over a period of months or years. Additionally, allowing staff to invest in the firm’s own products naturally increases alignment with external investors. We would question the culture of a manager whose key staff are not financially aligned with external investors, and would consider a reluctance to dilute control and trust the team to be a reflection of poor governance.

Equality and diversity

Culture in the workplace has, particularly over the past few years, been thrust under the spotlight, primarily due to the way in which employees are treated by employers and colleagues. Financial services firms have been singled out as being particularly poor at dealing with equality and diversity, both in the sense of fostering it as well as handling cases of discrimination, bullying and harassment. Well-publicised news articles of staff blowing the whistle on their employer for not properly investigating and dealing with instances of gender discrimination, harassment and even sexual assault, inflict long-lasting damage on the industry.

In their sixth edition of Women In Alternative Investments (“WAI”), published in February 2019, KPMG asked 886 alternative investment professionals from around the world a series of questions to understand their perception of gender diversity. 65% of women surveyed believe that the sector is not doing enough to advance women, whereas only 45% of men feel the same. Similarly, 48% of women believe that their firm is not doing enough, against 30% of men. Men clearly perceive gender inequality to be less of a problem than women do. In an industry predominantly male, this immediately presents an uphill struggle.

Written policies and procedures are not enough to convince us that a firm is prioritising equality and diversity in the workforce. It is easy to pay lip service to this concept in front of investors but then not to actually take meaningful action. A manager’s culture in respect of employee equality and diversity is better shown through tangible action or outcomes: what is the composition of the workforce; how many senior leadership roles are held by women or those from ethnic minorities; how does the company support those who identify differently to others?

To illustrate the focus on outcomes, below are some of the actions we have observed managers taking to strengthen equality and diversity within their business:

  • Partnering with fellowships representing the interests of women, minorities and LGBT;
  • Giving employees the option of choosing which pronouns they wish to be associated with;
  • Hiring Inclusion and Engagement Officers to advance employee engagement, strengthen culture and promote a diverse workforce; and
  • Commissioning third parties to perform cultural reviews to identify areas for improvement.

We can discern a lot about a manager’s culture through the way that they interact with us during due diligence and after an investment has been made. It is important to understand these interactions early on in the process because they may be a strong indicator as to what we could expect if we were to ever recommend an investment by any of our funds.


Funds of funds, generally speaking, are portrayed as quite fickle investors. They have their own investor bases to appease and so any redemptions from their clients naturally result in redemptions from the underlying hedge funds. From our point of view, the stability of Aurum’s investor base has allowed us to build long-term partnerships with several managers who Aurum has remained invested with for a number of years. We generally find that the longer Aurum is invested, the more both parties trust each other and are willing to provide and listen to feedback. Aurum has held some funds in its portfolio for 24 years. To put this in context, we celebrated our 25th anniversary a little earlier this year.

The manager/investor partnership begins during due diligence. If we are not afforded a reasonable amount of a manager’s time and resources during the initial stages, we question whether we should expect anything different if something were to ever go wrong whilst invested. We also look favourably on managers who seek feedback from us, both during initial due diligence and after investing, as it shows that they are keen to leverage our experience of operational best practice across our portfolio. Similarly, if we recommend process improvements to an established manager based on what we see elsewhere, the willingness to take this on board indicates the extent to which the manager sees us as a partner: are we merely seen as cash cows or is an investment a two-way street where our partnership is valued? The type of relationship a manager seeks to build with us from the outset shows how collaborative their culture is.


Every manager affords us varying levels of transparency into their business and investment strategies. This is understandable, given the need to safeguard intellectual property and information about the portfolio. That said, there is a minimum level of transparency that we do expect, because not having the full picture leaves us unable to form an opinion as to the suitability of a fund for investment. If we feel we are not being afforded sufficient transparency, particularly regarding a critical area of the business, this might betray an unnecessarily secretive culture and make it harder for us to fully trust the manager. In such a scenario we may well recommend a veto on investment.


It is of paramount importance that we are told, in good time and with sufficient detail, whenever an underlying fund experiences a problem. The extent to which managers will be up front with us about issues depends on the partnership we have built with them. All the same, regardless of how long we have been invested, we would expect to be told about problems in a timely manner. If they are deliberately hidden from us, it may become harder to take action to protect our investors. It also means that we may not be able to trust a manager to give us timely information about other issues in the future. If a manager is not forthcoming, it may betray a significant cultural weakness that again could lead to a veto being recommended.


Whilst there are some HR-related policies that all firms need to have, the individual approaches towards employees can yield huge cultural variances across different firms. We also observe a lot about a manager’s culture during the due diligence process and when invested through the interactions we have with them. The approaches towards employees and fund investors are key lenses we can look through to interpret their culture. In the fourth and final part of this series, we consider how culture can be observed through a manager’s risk management framework.


This Post represents the views of the author and their own economic research and analysis. These views do not necessarily reflect the views of Aurum Fund Management Ltd. This Post does not constitute an offer to sell or a solicitation of an offer to buy or an endorsement of any interest in an Aurum Fund or any other fund, or an endorsement for any particular trade, trading strategy or market.

This Post is directed at persons having professional experience in matters relating to investments in unregulated collective investment schemes, and should only be used by such persons or investment professionals. Hedge Funds may employ trading methods which risk substantial or complete loss of any amounts invested. The value of your investment and the income you get may go down as well as up. Any performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable indicator of future results. Returns may also increase or decrease as a result of currency fluctuations. An investment such as those described in this Post should be regarded as speculative and should not be used as a complete investment programme.

This Post is for informational purposes only and not to be relied upon as investment, legal, tax, or financial advice. Whilst the information contained in this Post (including any expression of opinion or forecast) has been obtained from, or is based on, sources believed by Aurum to be reliable, it is not guaranteed as to its accuracy or completeness. This Post is current only at the date it was first published and may no longer be true or complete when viewed by the reader. This Post is provided without obligation on the part of Aurum and its associated companies and on the understanding that any persons who acting upon it or changes their investment position in reliance on it does so entirely at their own risk. In no event will Aurum or any of its associated companies be liable to any person for any direct, indirect, special or consequential damages arising out of any use or reliance on this Post, even if Aurum is expressly advised of the possibility or likelihood of such damages.

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