While at a carnival a few months back, our ten-year-old daughter entered my wife into a “contest” to win a free ocean cruise, unbeknownst to us. A few weeks and many soliciting phone calls later, we realized we had an opportunity for a teaching point on reading the fine print. While the picture on the entry box for the contest certainly looked appealing, with a handsome couple sunbathing by clear, blue Caribbean waters, the reality was that “winning” the contest gave you one free cruise—while accompanied by another adult paying full price, meals and transportation to point of departure not included, other fees may apply. And, if that wasn’t the kicker enough, your entry meant that you agreed to be solicited by the sponsoring firm. Oh, and you had to sit through a presentation while on the cruise.
This is advice I’ve found extremely valuable in the investment management industry when selecting investment managers. Things are not always what they seem, and by doing a little bit of digging, you can unearth some red flags that hopefully help you make a more educated decision, or at least ask the right questions. Disclosures, often ignored, are invaluable when analyzing the performance of a strategy you’re considering.
Here are a few situations I’ve run into:
- Backtested Numbers
- Seed Accounts
- Merged Track Records
Look out for my second post next week as I go deeper into these scenarios!