Inside a Hedge Fund Office: The FCM Onsite Visit Case Study (Part 2)
In Part 1 we covered the theory behind onsite interviews. Now Travers takes us inside the actual visit to Fictional Capital Management. This is where we get to see how all those interview techniques play out in a real (well, fictional but realistic) setting.
And honestly, this part of the book reads almost like a courtroom drama. Travers is pressing, probing, circling back to earlier answers, and reading body language. It is fascinating.
The Interview with Ted Acoff (Portfolio Manager)
The visit starts with Travers sitting down with Ted Acoff, the portfolio manager. He had already spoken to Jaime (the research director) by phone. Now he is face to face with Ted, and the questions get much more direct.
Here’s the thing, Travers already did his homework. He reviewed FCM’s 13F filings, ran his own liquidity calculations, and came prepared with specific numbers. This is not a casual chat. This is an interrogation dressed up as a meeting.
Exposure and Short Selling
Ted says the fund runs roughly 175 percent gross and 50 percent net exposure. But the conversation gets interesting when they talk about the short book.
Their approach to shorts is basically the inverse of their longs: they look for weak management teams, bad investments, no history of consistent free cash flows. And their short positions tend to have low short interest, meaning FCM finds short ideas before the crowd. They avoid well-traveled hedge fund names on both sides.
The Transparency Push
Travers pushes for portfolio transparency. FCM was not comfortable emailing older portfolio snapshots. So Travers brings it up directly with Ted.
Ted says they have never sent full portfolios to anyone. Travers pushes back: you are marketing to institutional investors now, they will ask for the same thing, and old portfolios should have no sensitivity since positions have turned over many times.
Ted says he will discuss with the partners. Travers reads his body language and thinks there is a good chance they will agree. Good lesson: you do not just accept “no” the first time.
The Liquidity Discussion
This section is clever. Travers confirms that FCM held smaller, less liquid stocks in the early days when the fund was smaller. This matters because if past performance came from investing in tiny stocks that the fund can no longer buy (because it is too big now), you have to discount that track record.
Ted claims they can fully liquidate the portfolio in a month. Travers says he ran his own numbers and found that several positions would take longer than a month to sell, assuming 25 percent of average daily volume per day.
Instead of arguing, Ted offers to have the trader come explain their liquidity math. But here is the real move. Travers uses this conversation to naturally request the prime broker’s liquidity and risk reports. Instead of just cold-asking for it, the discussion flowed there organically. Smart.
The Sell Discipline (and the Stop-Loss Confusion)
This part is revealing. Travers asks about sell discipline, and Ted explains they set price targets and write a thesis for each trade. When the target is hit or the thesis changes, they typically sell or cover.
But then Travers asks about stop losses. In his earlier phone call, Jaime had said they have a -20 percent stop on shorts that was a hard rule. Ted now describes it more as a review trigger, not a hard stop. This inconsistency is exactly the kind of thing Travers was looking for.
He keeps pressing. Ted eventually gets a bit defensive: “Do you require your managers to have hard stop losses? You are really hammering this one.”
Travers is not trying to be difficult. He just wants to understand what they actually do versus what they say they do. Ted finally explains: they generally reduce short positions by half at -20 percent, and more than half the time they cover completely. Longs get more room because the downside is limited, while shorts have unlimited loss potential.
The Ted vs. Jaime Dynamic
Travers picks up on something interesting. Jaime had hinted that Ted is too conservative. Ted confirms this, saying they have “numerous discussions” about position weights. Jaime wants bigger position sizes (6-8 percent for longs versus Ted’s preferred 4-6 percent). Ted’s response is essentially: the current system has worked for seven years, why fix what is not broken?
Travers asks the tough question directly: could this disagreement cause a rift? Ted says no, they are close friends personally and professionally, and an active dialogue about fund management is healthy.
The Stock Ranking System
FCM uses a simple ranking model with four components. For each stock they calculate:
Score = (Upside/Downside) x Correlation x Conviction
Correlation and conviction are each scored from 1 to 5. High correlation to the portfolio gets a low score (bad), while low correlation gets a high score (good). High conviction gets a 5, low conviction gets a 1. They multiply these three numbers together.
It is simple but effective. They use it for both longs and shorts, ranking each within its own book. New stocks only get added if they score above the lowest-ranked stock already in the portfolio.
Travers then challenges Ted on portfolio themes. Ted says they are bottom-up investors with no themes. But Travers points out that 20 percent of the long book is in three outsourcing companies and 14 percent is in three semiconductor stocks. Ted explains the correlation within outsourcing companies is actually low (different businesses), and the semi positions are weighted at the lower end of their range because they are aware of the correlation risk.
The Meeting Notes
After the interview with Ted, Travers explains why formal meeting notes are important. He gives three reasons:
- Other team members can learn about the interviews
- Writing formal notes forces you to organize your thoughts (handwritten notes are a mess)
- They create a historical record for future visits
The book then provides an actual example meeting note that Travers would send to his team. It covers:
The Office: FCM’s space is bare bones. About 1,500 square feet, no reception area (you walk right into the trading room), shared conference room, six connecting desks in pairs. The whole investment team sits next to each other. This is actually a positive sign for communication.
Ted Acoff: Two hours of conversation summarized. Key points: their background from GCH, equity long/short strategy in small caps, strong performance in all five years including 2008, and the fact that they used to invest in less liquid micro-cap stocks when the fund was smaller.
Jaime Wernick: Not much time spent since they already spoke by phone. But Travers observed him interacting with analyst Joyce about Diamond Foods. The discussion looked natural, not staged. Jaime also showed the research file system, organized by “current holdings” and “previous holdings” on their shared drive.
Joyce Modlin (Analyst): Met separately in the conference room. Strong background (Columbia, Wharton, Creeson Capital). Lead analyst on 12 current names with 15 more in the pipeline. She said the ranking model was “just one of many tools,” and that the real edge was research quality and concentration. She hinted she would like a clearer growth path within the firm.
Charles Reiter (Junior Analyst): Brief desk visit. Former investment banker, hired in 2011. His work was detail-oriented and his files were complete.
Jacob Holder (Trader): This one was interesting. Jacob is mostly an execution trader but spends half his time helping with research. When Travers asked if Jacob led any stock coverage, Jaime jumped in and said Jacob only assists others. Travers watched Jacob’s reaction, could tell he did not like being boxed in, and predicts he might leave unless his role grows.
The Follow-Up List
The chapter ends with a clear list of next steps after the onsite visit:
- Conduct operational due diligence (interview COO and CFO, verify service providers, review documents and audits)
- Risk assessment of the fund (both qualitative and quantitative)
- Reference checks for key team members
- Use position-level data from the visit to verify historical attribution and assess liquidity
- Get prime broker and administrator reports
- Check quality of recent investors (are they just performance chasers?)
- Background checks on the three principals
Key Takeaways
The FCM case study shows that onsite visits are about much more than checking a box. Travers caught an inconsistency between what Jaime said on the phone and what Ted said in person about stop losses. He identified a potential personnel risk with Jacob. He pushed for transparency and independent verification through the prime broker.
The lesson is clear: prepare thoroughly, ask pointed questions, watch body language, and always verify what one person tells you against what another person says. The best due diligence analysts are like detectives. They are not trying to catch people lying, but they are making sure everyone is telling the same story.
Previous: Chapter 8: Onsite Interviews (Part 1) Next: Chapter 9: Operational Due Diligence (Part 1)