How Managers Perform Conflict Resolution in Hedge Funds/Asset Management

(Find the original article here and the SlideShare presentation here)

Conflicts are something very present in the world of asset management, an industry with big egos. From analysts to traders to the managing partners of the firm, there are many reasons and types of conflict within an asset management firm. Conflict resolution in hedge funds and other asset management firms is important to prevent talent churn and retain institutional-quality operations.

Types of Conflict

There are usually five main types of conflict with a hedge fund/asset management firm:

1. Conflict between fund/firm managing partners/co-CIOs;
2. Conflicts between PMs/traders and analysts when turning research into trades;
3. Conflicts between PMs/traders and risk/compliance over authorizing specific trades;
4. Conflicts between PMs/traders/analysts over the quality of ideas/research;
5. Conflicts between a talent manager (CEO/CIO or HR partner) reducing a trader/PM’s allocation, demoting or firing them;

The first type, conflict between managing partners/CIOs is outside the scope of this article for the simple reason that the decision-making process should involve one and only one key decision maker. If there are two key decision makers, there will be much more serious consequences for the firm than that actual conflict, one of them being selling the validity of the decision-making process to prospective allocators.

(Un)Healthy Conflicts

It’s important to establish, before anything else, that conflicts can be healthy or not, and more times than not that comes down to the culture of the company. A firm that puts emphasis on healthy discussion, almost “an obligation to dissent” will see conflict as something healthy, even if it’s hard sometimes for people to admit they’re wrong. But they will understand and respect the values and the process and will assume it’s a part of doing business.

On the other hand, promoting a butt-covering culture where people don’t want to admit their own faults or talk about their past experiences does not promote healthy conflict. In fact, it might promote avoidance. Whatever conflict comes up will be seen as a threat to egos, people will be defensive and things won’t go well.

I usually define a three-step process for conflict resolution, the ETC model:

1. Apply Empathy;
2. Separate Task Conflict from Relationship Conflict;
3. Reinforce alignment with Culture and/or Candor;

We’ll look at the steps in particular, but in short, this means putting yourself in the other person’s shoes, then declaring you disagree with the idea/concept and not with them as a person, and then stating your critique is aligned with the company’s values. This usually brings down the shields in a conflict and helps steer towards resolution.

Step 1. Applying Empathy

Conflict usually comes down to egos. Somebody that wasn’t heart wants to be heard or someone that was heard felt like they weren’t properly heard. Usually, when someone is heard but something just can’t be done, they respect the decision. The problem is they don’t feel heard in the first place.

Therefore, it’s not surprising that one of the key techniques to easily solve conflicts comes down to empathy. Besides empathy, you can use a full spectrum of Emotional Intelligence techniques, and you can also use specialized empathy techniques like Chris Voss/The Black Swan Group’s Tactical Empathy, but at the end of the day, the key behind empathy is making the other side feel heard. And because they feel heard, you build a deeper connect and they respect your decisions more easily.

An example of this is a trader who feels like the research behind a trade wasn’t well made, so they are arguing with the analyst. The analyst feels the merit of their analysis hasn’t been understood, and the trader feels the criteria for his investment thesis aren’t being respected. This is a typical example ripe for conflict resolution in a hedge fund.

Both sides can benefit from using empathy. The analyst can verbalize something like “Hey, I really understand you have to meet these criteria, I understand this must be hard and that you cannot obtain all the information you need, and it’s frustrating — but unfortunately this is all that could be obtained”. On the other hand, the trader can demonstrate empathy on their side by saying “Hey, I understand that it’s hard to do research work, and that you might be thinking that I’m disregarding or disrespecting your analysis. I really understand how hard it is to corroborate this idea and to put it into paper. Unfortunately, I really need more than this”.

There are more specific components you can use to turbocharge empathy (look at Tactical Empathy’s starting from no, labeling, mirroring and the Accusation Audit, among other things), but the gist of it is to understand the other party’s point of view and demonstrate to them that you do.

In short, empathy comes down to demonstrating that you understand the other side. Just by demonstrating this, they will respect you. They don’t necessarily have to agree with your point of view or even like you, but they will have to respect you.

Situational Empathy Models

When you’re trying to apply empathy to “disarm” somebody, there are some templates I’ve seen repeated over and over again, from different clients, for specific purposes. These “empathy templates” are resulting from several successful situations of conflict resolution in hedge funds/asset management clients:

Disagreeing with an Investment Process/Strategy

“John, I really understand your point of view. I understand your finance expertise and the skill with which you usual craft portfolios and define strategies. I respect that in you and that’s not at stake here. I understand you might consider this is disrespectful, or a personal attack even, but unfortunately I have to tell you I disagree with this portfolio/strategy”

Disagreeing with an Idea

“John, I understand you came up with this idea, which seems very valuable, and that you’re proud you came up with it. I agree, it sounds very good as an idea in general. However, please allow me to say that in the current environment it just won’t work. This isn’t an attack on you as a professional or judging you. It could be a great idea and work, but in this case it just doesn’t. I’m very sorry for this”

Telling an Analyst Their Research Is Not Enough

“John, I know how much value you put into this research, and everything that you had to go through. I know your attention to detail and the effort you put into everything. However, I have to say that unfortunately this is not enough for me to turn into an investment thesis. I need additional details in order to consider this a high-conviction idea. Unfortunately, as it is now, I can’t use this research”

Telling a Trader/PM They Must Obey Risk Guidelines

“John, you know we value you as an investment professional. We appreciate the returns you’ve given us and the expertise that you brings so far. However, I have to tell you that you have to comply with risk parameters. It endangers not only your own portfolio but the fund when you don’t obey these guidelines. We value you as a professional, but in order to perform at your best you have to comply with these parameters”

Demoting/Removing Allocations/Firing a Trader/PM

“John, I fully appreciate the value that you’ve given us so far. I consider you a valuable investment professional, and I understand how demanding and stressful the job is, to earn even reasonable returns. You may be angry at me for telling you this, but unfortunately we have determined that things aren’t working out, and unfortunately we have to decrease your allocation/ask you to go back to analysis only/ask you to leave”.

As you can see, all of these empathy templates have some traits in common. You start by demonstrating empathy — what the other side must be feeling — “I know you put a lot of work into something“, You’re proud of this“, “You’re valued by your performance“. You anticipate objections to disarm them — “You’re going to think I’m unfair”, “You’re going to think I don’t care”, then you very honestly and sincerely explain the issue. Possibly, additionally add an unbreakable standard in the end (“It just has to be this way and there is no option. I’m sorry“).

Step 2. Task Conflict and Relationship Conflict

Another technique that may come in handy is separating task conflict from relationship conflict. That is, separating when you have a problem with the person versus the idea. Ideally, there is zero relationship conflict and all task conflict — you only have problems with ideas or research, and never with the specific people.

So, for example, if somebody suggests an idea at an ideagen meeting and you think it’s crap, feel free to tell them that in appropriate language to the firm. Just make sure they understood you’re not attacking them personally, and that the problem is with their idea (and for bonus points, that everybody has crap ideas as well). Separating the person from the act makes it easier to critique without threatening someone’s identity.

Step 3. Reinforcing The Culture and Candor

Culture plays a much bigger role in conflict resolution in hedge funds/asset management firms than you might think . It’s important that your position in a conflict is justified by the values of the firm. Not in a sarcastic or cynical way, such as “Our company values tell us not to accept crap, and this idea is crap”, but in a genuine way, such as “I respect you, but one of our values is honest and I have to promote that honesty by saying I fully disagree with this”.

This way you further de-personalize the conflict. You further establish that you are respectfully critiquing an idea/research/trade because you have to in accordance to your collective code of conduct, and not as a personal jab.

Besides the company culture, one thing that I’m a very big fan of is candor, specifically implementations like Kim Scott’s Radical Candor, where she claims that there are two communication dimensions (caring and challenging), and that Radical Candor is what is present when both are present. If you have a conflict, you are already high on the challenging axis, but you can insert some caring to improve the communication. That is, showing the person that you’re giving them this feedback for their own good and to progress as a professional.

“But Vasco, This Isn’t Manly”

One comment I get from male clients, more than I expected (especially in the 21st century) is that empathy and de-personalizing the conflict is not “manly” enough. You’re showing weakness, vulnerability, and minimizing the impact of what you mean to say.

I see this as the opposite. I see empathy as one one of the manliest things you can do. It’s like you are in an elite rugby team and one of your teammates made a wrong play, but they think they’re right. Shoving it in their face and trying to take them down isn’t manly. Opening up, understanding how they took their best shot but failed, telling them why you thought it was wrong despite respecting it is actually the true manly thing to do in my view. You’re sticking to your principles and respecting their value, instead of thinking you will only have value by destroying theirs.

Conclusion: Towards The ETC Model for Conflict Resolution in Hedge Funds and AM Firms

Although there are multiple techniques that you can use to resolve conflicts, this three-step process provides a simple framework you can use to immediately make the situation better. We all make mistakes. We all have bad ideas, do incomplete research or execute a disaster trade sometimes. The goal is not to euphemize or bury your point when critiquing. It’s just to show more respect when you do.

Following the simple process of empathy — task conflict — culture alignment can help take the personal element out of conflicts and make it easier for the person who was wrong.

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