The New Organizational Paradigm: A Single Portfolio Manager and a Band of Scouts

Hedge funds and a few pioneers in the traditional investment management business began altering the nature of investment management in the 1980s. The traditional approach involved trying to eke out a little extra return from diversified, often narrowly stylized, long-only portfolios. The upstarts eschewed this approach in the interest of capturing alpha however they could. If they had to cross traditional asset-class boundaries, make extensive use of derivatives, sell short, and introduce some leverage, so be it. A few years ago, the author began advocating a new organizational paradigm, one that is functional rather than asset-class oriented. The new paradigm calls for two principal boxes on the organization chart beneath that of the CIO. One box is labeled Portfolio Management, and the other, Scouts. The Portfolio Management unit controls beta exposures and active risk at the total fund level. The function of Scouts is to seek exceptional active management opportunity wherever it may lie.