Pre-Negotiated Manager Exit Playbook
Script PM exits before they happen so every drawdown conversation is civil and pre-agreed
Most hedge fund exit conversations fail because both sides are negotiating under stress with no shared reference point. This framework eliminates that friction by codifying risk bands and exit triggers in the investment management agreement before the PM takes a single trade. The centrepiece is a co-authored reaction-function playbook documenting which catalysts the PM is positioned for and what they will do if scenarios unfold differently, combined with the manager's self-declared exit level. When performance deteriorates, both parties consult the same document. The PM already named the level at which they would stop. When that level is hit, the exit is acknowledged mutually without blame, no redemption form drama, and no hard feelings. Transparency before distress converts an adversarial moment into a professional off-ramp.
- Transparency before distress eliminates surprise and blame
- Managers know their own strategy best — their self-declared exit level is the most credible trigger
- Pre-agreed criteria transform termination from a unilateral act into mutual acknowledgment
- Risk bands belong in the IMA, not the post-crisis conversation
- Everyone reading the same playbook makes for adult conversations
- Codify risk bands in the IMA before trading beginsDuring IMA finalization, define net exposure, GMV, concentration limits, and the maximum drawdown the PM would never expect to hit. Document these as binding reference points, not guidelines. Each PM's strategy requires its own calibration — do not copy bands from other mandates.Pro tipAsk the PM to propose the bands rather than imposing them. Managers who own their limits are far more likely to flag proactively when they are approaching them.WarningGeneric bands lifted from other mandates invite disagreement when tested. Lazy calibration undermines the entire framework.
- Co-build the manager's reaction-function playbookSit with the PM before they trade and map the thesis: which catalysts are they positioned for, which stocks represent those bets, and how they will respond if each scenario unfolds differently from expectations. Good playbooks have explicit if-then logic.Pro tipA strong reaction-function entry reads: 'If stock X trades below price Y, I will reduce by Z%.' Concrete logic prevents retrospective rationalization.
- Ask 'at what level would you fire yourself?' and record the answerExplicitly ask the PM to name a P&L or drawdown level at which they would voluntarily stop. Record this number in writing and reference it in the IMA. This becomes the shared exit trigger both parties own — not a number the allocator imposed unilaterally.WarningSkipping this question means any future exit will feel like the allocator's unilateral decision, creating resentment even when underperformance was unambiguous.
- Establish a weekly risk review cadenceHold structured weekly calls with the risk team covering the risk budget, crowding exposure, liquidity position, and how the hedging overlay is affecting the book. Daily calls generate noise and erode manager autonomy; weekly is the sustainable frequency.Pro tipUse an identical agenda each week so both sides arrive prepared and the conversation stays on substance rather than format.
- Monitor live against pre-agreed bounds and flag earlyTrack all risk metrics against IMA bands in real time. Raise the conversation when the PM approaches a limit — not only after a breach occurs — to allow corrective discussion before an exit becomes the only option.WarningWaiting for a breach to flag an issue hands the PM a surprise they could have avoided and signals poor oversight on both sides.
- Execute exit on pre-agreed terms with full transparencyWhen the self-declared level is hit or bounds are persistently breached, reference the playbook explicitly, confirm both parties acknowledge the trigger was reached, and agree on liquidation timing and method. No redemption form bureaucracy and no blame required.Pro tipThe manager who defined the level should be the one who calls it — the target outcome is a phone call that ends with 'yep, I can't hold it against you.'
A Docside PM went outside their pre-agreed risk bounds for several consecutive days. Over the prior week the risk team had walked through the reaction-function playbook — catalysts, positions, and the PM's self-declared exit level. When the level was hit, the PM picked up the phone. Both sides already knew the outcome. The conversation lasted minutes, liquidation was agreed on the spot, and no redemption paperwork created friction. Everyone stayed on good terms because no one was surprised.
When Docside onboarded one of its earliest PMs, risk bands were discussed as part of IMA finalization before the first trade. The PM proposed a maximum drawdown ceiling — a level they genuinely never expected to hit. That number was recorded and became the shared reference for every subsequent risk conversation. The PM launched with full autonomy knowing exactly where the relationship would end if performance deteriorated severely.
Extracted from Capital Allocators with Ted Seides (Ep. 501). Derek Drummond, Tony Caruso, and Will England described Docside's PM oversight practice, where asking managers to define their own exit level grew out of repeated frustration with the guesswork and hard feelings embedded in traditional redemption cycles.