It’s a question every asset allocator dreads, but inevitably must answer: when a fund in your portfolio stumbles, when does a loss signal a mistake, and when does it signal a betrayal of trust? For Jennifer El-Hillow, Chief Investment Officer at the $418 billion Russell Investments, the distinction is everything. Her role isn’t just about picking winners; it’s about forensic stewardship, deciding which red numbers deserve patience and which warrant a swift redemption.
El-Hillow’s perspective is particularly poignant following the recent, high-profile troubles at Leopold Aschenbrenner’s Situational Awareness fund, which was forced to liquidate much of its public equity book due to margin calls. While Russell isn’t an investor there, the episode serves as a stark reminder of the fine line managers walk. A significant loss doesn’t mean an automatic redemption, El-Hillow told me in an interview at Russell’s offices, but it can be a wake-up call for some funds that believe a good idea will always win out.
The core of her philosophy is alignment. The most important thing is that we know the managers we’re hiring are staying true to what we hired them for, she explained. This means continuously evaluating not just returns, but the exposures, leverage, and specific risks embedded in each position, and ensuring they haven’t strayed from their mandated strategy. It’s a dynamic process of protection for the broader portfolio.
This scrutiny intensifies when markets turn volatile. Sometimes the market does something that’s not expected, and how you manage through that can be telling to an allocator, El-Hillow noted. Does a manager panic-trade, deviating from their core process? Or do they demonstrate the discipline to stay the course? For allocators at firms like Russell Investments, a fund’s behavior during a drawdown is often more revealing than its performance during a bull market.
| Considerations for Evaluating a Fund |
|---|
| 1. Alignment of incentives |
| 2. Transparency of operations |
| 3. Response during market volatility |
| 4. Staff turnover |
| 5. Histories of past performance |
| 6. Communication of strategy changes |
The calculus becomes even more complex when considering the human and structural incentives at play. Hedge funds typically earn their lucrative performance fees only when they surpass their high-water mark – the peak value the fund has previously achieved. A deep loss can reset this marker to zero, creating a powerful, and potentially dangerous, motivation. Are they going to be taking the right kind of risk, or are they going to be taking outsize risk in order to dig themselves out? El-Hillow asked. This dynamic famously contributed to the 2022 shuttering of Melvin Capital, after catastrophic losses in the GameStop short squeeze left founder Gabe Plotkin proposing a restructuring to restart fee generation, a plan investors ultimately rejected.
Beyond the numbers, El-Hillow and her team monitor softer indicators. Staff turnover following a period of significant losses is a critical data point. Are key analysts and risk managers jumping ship? This can signal internal discord or a loss of faith in the leadership’s plan, complicating any recovery. It’s a holistic diligence process that goes far beyond the quarterly fact sheet.
Ultimately, for Russell Investments, the foundation of any lasting manager relationship is transparency. The firm often partners with hedge funds via separately managed accounts (SMAs), which grant El-Hillow’s team a real-time view into holdings and exposures. This level of access is non-negotiable. We’ve got to know what they’re doing and why they’re doing it so we can make a good decision on whether we need to take action, she stated. Choppy performance or a tweak to the investment thesis must be communicated clearly and immediately, not buried in a monthly commentary.
Timing is often the trickiest thing with investing to get right, El-Hillow observed. The same is true for judging a manager in distress. The decision to stick with or exit from an underperforming fund is a multidimensional puzzle, weighing conviction in the individual stockpicker against the integrity of their process, the alignment of their incentives, and the transparency of their operations. For allocators tasked with safeguarding hundreds of billions, like those at Russell Investments, it’s a judgment call where data, experience, and instinct must converge. There is no automatic sell button, only a continuous, nuanced evaluation of whether a manager has made a bad bet or broken a sacred trust.
