A couple of years ago, I put on a pair trade for a “sophisticated” client. One side was the anchor – multi-strategy and income, built for ballast. The other was the satellite – more aggressive positions in AI and China, built for growth.
The aggressive side hit a rough patch and suffered losses. That was not the whole portfolio. The client was making money elsewhere, while the anchor was doing exactly what it was designed to do, cushioning the more volatile positions and giving them time to work.
The client did not see it that way. This was the same client who, during onboarding, told me with a straight face that he could stomach volatility. Turns out he could stomach volatility the way most people can stomach a diet right up until the first missed meal.
For what it is worth, those aggressive positions subsequently recovered. The pair trade worked. Well, the biggest predictor of whether a relationship – client, partner, distributor, whoever works is not credentials or the size of the account. It is whether both sides share the same basic values and expectations.
Everyone talks about “aligned interests” in the first meeting. The real test comes when markets fall or a strategy takes longer to work than expected. That is when you discover whether you were actually aligned.
A portfolio needs to be judged as a portfolio. The anchor is not supposed to behave like the satellite and the satellite is not supposed to behave like the anchor. They have different jobs.
Understanding volatility on a presentation slide is easy. Living through it when the number is red and it is your money is something else entirely. Can they respect the process when things get uncomfortable?
I have always been a process person. Of course, some clients do not particularly care about the process. Fair enough. Results matter. We are not in this business to produce beautiful presentations about process while losing people’s money.
Process matters because markets are uncertain. A sound process gives good ideas time to work without allowing one difficult position to sink the ship. The same applies to business partners. The good ones bring something to the table – access, experience, credibility, operational muscle and share the same values about how clients should be treated and how business should be conducted.
I do not need every client and I do not need every partner. I would rather work with people who understand the process, share the same basic values, and know that investing will occasionally test both.
The wrong relationship consumes far more time and energy than it is worth. Some relationships are not casualties of bad investment decisions at all. They are casualties of a mismatch that was there from the first meeting, disguised as “risk tolerance.”
Perhaps that is why I am particularly grateful that many of the people I work with today have been with me for 15 years or more. Relationships like these are built on more than performance. They are built on trust, mutual understanding and the ability to stay the course when markets inevitably become uncomfortable.