Click below to watch the video!
For International Women’s Day this year I thought I’d create a modern day nursery rhyme to remind women everywhere that they have financial power and acumen that they may not even realize. You are so money, ladies!
(c) Morguefile.com
A few weeks ago, I put out the call on Twitter that I wanted to write an investment manager agony column. Of course, in the deluge of Mad King tweets that seem govern both foreign and domestic affairs of late, that call went largely unnoticed. I was beginning to agonize over the general lack of agony when I heard a primal scream from the darkness - otherwise known as a Twitter DM.
“WHY CAN’T I RAISE ANY ASSETS????”
This, of course, is one of the most pervasive forms of investment manager agony, so I decided to tackle the question, using my own misery as my guide. You see, as a single woman in my 40s, I know all too well the frustration that comes from looking tirelessly for something that proves to be incredibly elusive. In my case, I’ve turned to the modern-day Wizard of Oz, otherwise known as the Internet, to try to solve my dating dilemma. I mean, we’ve all heard stories of our friend’s cousin’s sister Becky who is happily married with two kids to a guy she met on Tinder, right?
After a few months of my recent Internet experience, I remain convinced that there are good matches out there, although perhaps not in Nashville, which seems to be the dead fish picture capital of the world. I mean, one of my governing theories about dating and fund raising is that there is, in fact, a lid for every pot, so I refuse to admit defeat.
BUT I remain even more convinced that there are some super obvious giveaways that maybe this one ain’t “the one.”
So, Dear Random Twitter Fund Manager, I propose to you that perhaps you’re quite the investment catch, and you just haven’t met the right investor who can make all your dreams come true.
Or you may be like one of these folks that pop up in my dating feed from time to time, in which case buckle up, Buttercup - you’re probably in for a bumpy ride.
Look, if you’re newly separated from your prior firm and you don’t have a great, audited and portable track record to vouch for you, many investors are going to have trouble getting involved. I mean, you could prove pretty unstable, you know?
I don’t want to insult the vertically challenged, but I have a hard and fast rule that I won’t date anyone shorter than me. I mean, I’m 5’3” for Pete’s sake. It shouldn’t be that hard for an adult male to be taller than that. I just have this horrible mental image of my (potential) boyfriend’s jeans being smaller than mine that I can’t get over. And it is not hot.
Like me, many investors have trouble getting past a fund that is just too small. It may be that they have an investment policy statement that says they can’t be more than 10% or 15% of your assets, which makes the allocation (and the time for due diligence) just not worth it. It may be that they worry about the business risk or how you’ll support the firm when performance isn’t great. Whatever it is, move on. There ARE folks that will find your size appealing, from seeders to Managers of Managers. Swipe right on them instead.
It has taken me a while, but I’ve finally learned that people who put NO DRAMA in all caps ALWAYS bring the drama. Always. And if you’re bringing the drama to investors in the form of volatility, crazy headlines, drawdowns or worse, they’re going to figure that out, too, and run in the opposite direction.
I hesitated to use a picture from my own “dating” experience, but given the anonymity factor in this photo, I figured I was safe. Seriously, y’all, this guy popped up for both me and a friend recently, leaving both of us to wonder “Is this a joke?!”
Maybe your fund marketing efforts don’t involve a Santa hat, but all the same, maybe you’re still not taking your marketing seriously. Do you have a high quality marketer on board? If you are doing your own marketing, have you reviewed your successes and failures to figure out what to do differently? Do you have a compelling pitch book? Do you go to enough conferences without going to ALL the conferences? If you don’t take marketing seriously, and by that I mean treat it as if it were a legitimate part of your business, how do you expect money to flow in?
I actually had to look this up the first time I saw it. Evidently, there’s a whole crop of folks out there who think that if their significant other knows they’re being cheated on, it’s all good. Sorry, folks, but that’s just creepy. And weird. And off-putting. And perhaps your firm is perfectly happy calling an investor your one and only, but there may be something else slightly creepy and weird about your firm that is off-putting in its own way. Is your spouse or child a major player in the firm? That’s not a deal breaker for some folks, but it does raise the issue of controls. Do you have a third, fourth or fifth-tier auditor? Maybe you’re saving money, or maybe you’re hiding something (hello Bernie Madoff!). Have you had a lot of staff turnover in the life of the fund? Could be growing pains, or it could be you are hell to work with. Look at EVERYTHING in your fund the way an outsider would and ask yourself “Is this an easy tick box or does it raise some significant questions?” At the very least, be prepared to do some explaining in a meeting/due diligence process. At best, consider what you can do to mitigate the creepy factor soonest.
On the one hand, I have to admire this guy’s confidence. On the other much larger hand: euuuuwwwwww.
Likewise, confidence in investing is a good thing. But thinking you’re all that and perhaps talking in overly technical terms, charging fees that aren’t justified by your track record or strategy or acting like you’ll never have a loss is incredibly off-putting. And to be honest, this is often the subject of investor post cocktail banter at conferences.
So, Dear Random Twitter Fund Manager, I hope this helps to explain your marketing conundrum. And may the coming months bring you the satisfying relationship that I deserve.
In the meantime, if you have an investment manager (or investor) agony question I can “help” with, please don’t hesitate to reach out.
I probably attend approximately 30 investment industry conferences each year. That’s right, I eat roughly 60 rubbery chicken or salmon lunches, have an estimated 120 glasses of overly oak-y chardonnay, and listen to more than 200 panel discussions and fireside chats annually. Sure, I get to do these things in some pretty fabulous locations, from Malibu to South Beach to Manhattan, but I mostly see them all through the double-paned glass of hotel rooms and the pallor-enhancing lights of conference ballrooms.
I would like to think, however, that all this conference going has made me somewhat of a seminar savant. An expert, if you will, in the inner workings of panels, exhibit halls and networking lunches and the human behavior that goes along with them. In fact, as I was winging my way back from a recent event, I was ruminating on all the half-truths, misrepresentations and outright lies that get told at investment conferences. And I’m not talking about folks overpromising on investment returns.
So in an effort to help my fellow conference goers navigate the often-confusing maze of conference attendance and etiquette, I thought it might be helpful for me to share the wisdom of 300 plus conferences with you with my all new Top 10 List of Conference Lies and Deceptions:
Number 10– “Oh, come on! It will be an early dinner, I promise!” – No conference dinner that has more than two people in attendance is ever an “early dinner.” In fact, any conference dinner with more than 10 people is guaranteed to take *at least* three hours. Plan accordingly and eat a snack and call your kids to say goodnight beforehand.
Number 9– “We will be leaving 15 minutes for audience questions.” – Yeah, this likely won’t happen. While this is possible, get one or two talkers on a panel OR a session that is running late where the organizers need to make up time, and it is NOT going to happen. I’d say the odds of a full 15 minutes for audience questions is a 50-50 proposition at best.
Number 8– “We don’t need a pre-panel call.” You do. Everyone does. It doesn’t have to be a long call but knowing things like who will be in the audience, who else is on the panel and what questions people want to answer can save a panel from monotony or irrelevance.
Number 7– “We need more than one pre-panel call.” You don’t. In fact, if you talk too much before the panel the whole thing can seem either canned or panelists anticipate and answer questions before they are asked, and you end up with nothing to talk about when the moderator doesn’t want to spring questions on the panelists.
Number 6– “I’m just going to run to my room for a minute.” You won’t see this person again that day, or at least not before the next meal or cocktail.
Number 5– “Oh, I don’t need the full XX minutes for my remarks.” They do. And they may take twice that much time.
Number 4– “Oh darn! I’ve run out of cards!” Maybe they really have. Maybe they are like me and thought they had cards in their bag left over from the prior conference but didn’t. But many times, this means they don’t want you to have their contact details or they have limited cards and you don’t actually merit one.
Number 3– “I’ll meet you by the registration table/coffee station/in the hotel lobby.” Again, there is a reasonable chance that this may happen, but probably an equal chance it won’t. Often, I find this is a well-intentioned lie, and the person was genuinely waylaid en route to your meeting. But still, take it as more of a suggestion than a promise.
Number 2– “I didn’t order the vegetarian option.” They did. But when the flaccid grilled portabella mushroom or other vegan fare actually arrived, suddenly the chicken, fish or steak looked a whole lot better.
Number 1– “Oh hiiiiii! It’s so great to see you!” It probably is, but I’d lay odds this person doesn’t remember your name or can’t remember if they’ve met you before or not.
Now, I want to be very clear that I’m not calling out any person in particular and that, in fact, I believe I have, at one time or another over the last 15 years, been guilty of every single lie, misstatement and half-truth on this list. We all have been. But forewarned is forearmed. So be on the lookout for these conference calumniations so you can plan your time accordingly. One less minute spent looking for someone means one more sip of screw-top chardonnay, y’all.
Hey all! So this happened. Congress had a hearing on diversity in asset management and I was asked to testify. Please see my written testimony below or check out the actual hearing at THIS LINK.
Written Testimony before the
U.S. House of Representatives, Committee on Financial Services Subcommittee on Diversity and Inclusion
Hearing: “Diverse Asset Managers: Challenges, Solutions and Opportunities for Inclusion”
Meredith A. Jones
Investment researcher and author of “Women of The Street: Why Female Money Managers Generate Higher Returns (And How You Can Too)”
June 25, 2019
Chairwoman Beatty, Ranking Member Wagner and distinguished Members of the Subcommittee, it is an honor to appear before you today at this important hearing on how to achieve greater diversity in the asset and investment management industry.
By way of background, I am a 21-year veteran of the investment management industry. I began my investing career in 1998 at a small hedge fund firm in Nashville, TN when I was hired by a male CEO and financial services gender contrarian who believed that women made better financial analysts than men. While I worked my way up from my entry-level position as a hedge fund analyst to become the head of research and a member of the firm’s investment committee, I never doubted my boss’s hiring wisdom (although, always a fan of diverse opinions, I did eventually integrate the department to include men during my tenure).
Employed roughly 1,000 miles from Wall Street, I did not initially realize that other asset management and investment firms had far less gender diversity than mine. In fact, it wasn’t until I started regularly speaking at investment industry conferences (where I was often one of few, if not the only, female speaker) that I began to recognize how little gender and racial diversity existed in my chosen profession. I began to research diversity in asset and investment management in 2010 and, over the past nine years, have come to appreciate just how unique my investment “upbringing” was, as well as how unlikely it would have been for me to be sitting here today without my original boss’s unorthodox hiring preferences. However, even with that leg up, admittedly it has been a rather solitary career path, with few diverse role models, mentors, and sponsors along the way.
As challenging as the lack of diversity may have made my personal journey, that pales in the face of the systemic cost of homogeneity in asset management. In fact, nine years of research has left me with the unshakable knowledge that the lack of women and minorities in the asset management and investment industries is making everyone, from Wall Street to Main Street, poorer.
While this may be a bold statement, I believe a number of factors support the assertion that, as a society, we are missing out on a “diversity dividend.”
1) A wealth of investment research suggests that diverse asset managers may provide similar or even higher returns. Studies from the NAIC[1], CityWire[2], BarCap[3], Babalos[4], Morningstar[5], Rothstein Kass[6] and others show that diverse fund manager performance (either within separate funds or in mixed gender teams) is at least equal to and, in many instances, greater than that of the total investment fund universe. A 2016 study by Oleg Chuprinin and Denis Sosyura found that hedge funds run by individuals that grew up poor (bottom 20 percent of households in terms of wealth) outperformed those managed by managers from the top 20 percent by over 1 percent per year[7]. A 2019 study from Harvard University’s Bella Research Group further found that women and minority owned hedge funds, mutual funds and private equity firms had disproportionate representation in top quartile performance figures[8]. Another Harvard study found[9] that the chance of a venture capital-backed company filing for an Initial Public Offering increased by 20 percent if the backing investors were from different ethnic backgrounds, while venture capital firms that “increased their proportion of female partner hires by 10% saw, on average, a 1.5% spike in overall fund returns each year and had 9.7% more profitable exits,” again per a Harvard Business Review study[10].
These studies and others like them strongly suggest that investors, from the wealthiest of individuals to the police, firemen and teachers that depend on well-invested pension portfolios, may in fact have inadequate financial resources due to lack of access to diverse investment talent.
2) Access to diverse asset management talent may provide another diversification tool within portfolios, and may also help mitigate volatile market behavior, which is currently dominated by a single cognitive and behavioral pattern. At least one study has found that having more women on Wall Street could reduce market volatility[11] due to the introduction of differentiated investing behavior. Another review by investing platform Stash found men 87% more likely to sell[12] during periods of market volatility, which means diversity potentially provides both stability and liquidity in the markets. Furthermore, Hedge Fund Research’s Diversity Index (HFRI Diversity Index[13]) has posted a flat return (0.00%) over the last 12 months, which compares favorably to the HFRI Fund Weighted Index -1.24% loss in value over the same period, further evidence of return diversification.
In addition, according to the National Association of Investment Companies (“NAIC”), one reason for outperformance of diverse private equity managers may be differentiated deal flow. The report concludes[14] that “[m]any diverse fund managers have educational and work experience similar to investors in non-diverse funds. However, some also report having expanded, differentiated networks that allow for deal flow off the beaten path.To the extent that a fund manager has access to such deal flow and can strike deals with less competition, their returns, and investors, may benefit. For example, firms and funds focused on the EDM may have access to companies on the cusp of growth due to changing demographics and shifts in the global economy.”
Despite clear advantages to cognitive and behavioral diversification, some estimates indicate that as many as 95% of those taking risk with capital on Wall Street and in the asset management industry are white males, and we certainly know from a variety of sources that asset and investment management generally lacks diverse participants in any meaningful way. For example, per the Bella Research Group study[15] referenced above, “the number of substantially or majority diverse-owned funds represented just 8.6 percent of the total in 2017” and women-owned firms managed a mere 0.8% of all assets under management while minority-owned firms controlled 1.2% of fund assets. Leaving fund ownership aside, a 2017 review of the alternative investment industry by Preqin[16] found that women comprised less than 21% of all employees in private equity, venture capital, hedge funds, real estate, infrastructure, natural resources and private debt funds, and that, of these employees, only 11% (or less depending on the asset management segment measured) occupied senior roles. And TechCrunch reported that 81%[17] of venture capital firms don’t have a single black investor.
3) Concentration of venture capital investments into similar companies perpetuates unmet consumer needs and lack of investment and jobs into diverse and underserved communities.It has been repeatedly shown that the East and West Coasts dominate the venture capital landscape, with the Bay Area and the New York-Washington-Boston corridor landing an astonishing two-thirds of all venture capital investment[18]. This creates a vast, unexplored economic desert throughout much of the continental United States. In addition, female founders received just 2.2%[19] of all venture capital in 2017 and 2018, while from 2007 to 2012 black and Hispanic founders each received about 1%[20] each in venture capital investments. These statistics are both stark and critical for understanding lost economic opportunities.
Women influence 83% of consumer spending and $7 trillion of spending[21] in the U.S. annually, and consumer spending drives an ever-increasing percentage of the GDP,and yet women’s needs currently may not be met by venture-funded companies. A study by Neilson found[22] that “African American income growth rates outstrippednon-Hispanic whites at every annual household income level above $60,000and the largest increase for African American households occurred in the number of households earning over $200,000, with an increase of 138%.” Yet, their consumer needs may not be represented by current venture-capital funded companies. And “between 2016 and 2017, Hispanics increased their real median income by 3.7 percent[23], the highest of any demographic.”
The lack of funding outside of traditional money centers as well as the near exclusion of diverse founders represents a tremendous lost opportunity for investment, economic expansion and job creation in diverse and underserved communities. Additionally, this compounds the lost opportunities for higher investment return generation, where less competition for portfolio companies creates more reasonable valuations for investors.
In my opinion, these three factors lead to one powerful conclusion: Diversity pays a dividend in asset management, one that, at least with the status quo, we have no hope of collecting.
To address the continuing lack of diversity in asset and investment management, I believe we need to focus on educating three primary groups:
1) Investors– With pension liabilities funded at only 73.7%[24] and with an astonishing 78% of Americans extremely or somewhat concerned about being able to comfortably retire[25], it is critical that the return enhancement and diversification benefits available through investment with diverse asset managers be highlighted and pursued. After all, demand from investors almost always drives innovation and change on Wall Street.
2) Asset and Investment Management Firms– While investors stand to reap the benefits of higher returns, asset managers and investment firms will profit as well through higher income from fee generation. In addition, firms that maximize diversity for returns and diversification may be able to capture a higher percentage of investable assets as investors seek higher return products. Companies that understand how the “diversity dividend” can directly impact their bottom line are more apt to support educational efforts in pre-hire cohorts, recruit diverse talent, uncover and mitigate unconscious bias in hiring and promotion decisions, and provide mentoring, sponsorship and affinity groups as part of a robust inclusion effort. Finally, given the generational wealth transfer taking place to diverse individuals (and the gains in diverse economic status cited above), failure to serve these demographic groups as a client base will almost certainly take a toll on asset and investment manager profitability in the future, further prioritizing this issue.
3) Diverse individuals– Providing financial and investment literacy education to girls and people of color at a young age (high school or earlier) is critical to building a pipeline of qualified diverse asset management candidates. For example, studies have shown that girls opt out of math-related subjects as early as age 11 or 12[26], meaning that it is not sufficient to intervene at the college or graduate school level, when qualified candidates have already self-selected into other academic areas. As a board member for a non-profit that provides financial education to girls (with 69% minority representation), I can say that Rock the Street Wall Street sees a 97% increase in understanding of financial concepts and, perhaps most importantly, 67% of the girls indicate they are now extremely or very likely[27] to explore a major or minor in finance and economics. This type of early intervention is therefore beneficial in building a pipeline of talent for companies and investors, and of course benefits diverse asset management talent as well.
In conclusion, I certainly recognize that diversity in asset management is a complex and costly issue. It is one that has no single, simple solution as it ultimately springs from historical and ongoing conscious and unconscious bias, as well as access to opportunity, education and capital. I do believe, however, that through robust public-private educational partnerships, common-sense transparency requirements (to both measure progress and so investors can adequately assess the level of alpha-generating diversity at asset management firms) and suitable anti-discrimination and harassment statutes, we can change the face of asset management for the future, and enhance the economic well-being of both Wall Street and Main Street in the process.
[1]http://naicpe.com/wp-content/uploads/2017/10/2017-performance-report.pdf
[2]https://citywireselector.com/news/alpha-female-2018-mixed-gender-teams-produce-better-returns/a1145784
[3]https://www.managedfunds.org/industry-resources/industry-research/affirmative-investing-women-and-minority-owned-hedge-funds-a-barclays-capital-report/
[4]https://www.sciencedirect.com/science/article/pii/S0275531915000264
[5]https://www.fa-mag.com/news/morningstar--the-gender-lens-doesn-t-magnify-your-bottom-line-37579.html
[6]https://www.managedfunds.org/industry-resources/industry-research/women-alternative-investments-marathon-sprint-rothstein-kass/
[7]http://webuser.bus.umich.edu/dsosyura/Research%20Papers/FamilyDescentDec2016.pdf
[8]https://kf-site-production.s3.amazonaws.com/media_elements/files/000/000/281/original/2019_KF_DIVERSITY_REPORT-FINAL.pdf
[9]https://hbswk.hbs.edu/item/in-venture-capital-birds-of-a-feather-lose-money-together
[10]https://hbr.org/2018/07/the-other-diversity-dividend
[11]https://www.aeaweb.org/articles?id=10.1257/aer.20130683
[12]https://qz.com/work/1386775/study-of-investors-shows-differences-between-men-and-women/
[13]https://www.hedgefundresearch.com/family-indices/hfri
[14]http://naicpe.com/wp-content/uploads/2017/10/2017-performance-report.pdf
[15]https://www.institutionalinvestor.com/article/b1cwvq3mc37xwk/Asset-Managers-Owned-by-Women-and-Minorities-Have-to-Work-10X-as-Hard-for-Assets
[16]https://docs.preqin.com/reports/Preqin-Special-Report-Women-in-Alternative-Assets-October-2017.pdf
[17]https://techcrunch.com/2018/11/08/81-of-vc-firms-dont-have-a-single-black-investor-blck-vc-plans-on-changing-that/
[18]https://www.citylab.com/life/2017/10/venture-capital-concentration/539775/
[19]http://fortune.com/2019/01/28/funding-female-founders-2018/
[20]https://money.cnn.com/2016/04/12/smallbusiness/latino-venture-capital/index.html
[21]http://www.genderleadershipgroup.com/the-inclusionary-leadership-blog/210
[22]https://www.nielsen.com/us/en/insights/reports/2015/increasingly-affluent-educated-and-diverse--african-american-consumers.html
[23]http://hispanicwealthproject.org/resources/blog/new-hispanic-wealth-project-report-confirms-critical-role-of-hispanics-in-u-s-economic-growth/
[24]https://www.bloomberg.com/graphics/2018-state-pension-funding-ratios/
[25]https://news.northwesternmutual.com/2018-05-08-1-In-3-Americans-Have-Less-Than-5-000-In-Retirement-Savings
[26]https://techcrunch.com/2016/01/05/why-stems-future-rests-in-the-hands-of-12-year-old-girls/
[27]https://rockthestreetwallstreet.com
(c) 1983 Atlantic Releasing
I was roughly 13 years old when I fell for Nicolas Cage in Valley Girl. Between the Modern English montage of soda sharing and late-night phone calls (on corded phones and pay phones!) and the bitchin’ clothes and slang, my tweenage heart sang just a little for Hollywood punk Randy. In fact, if not for that movie, I doubt the phrases “Tubular!” and “Gag me with a spoon” would have ever made an appearance in my semi-rural Alabama hometown, even if the latter is what Northerners often think out loud when trying grits for the first time.
Although American slang has come a long way since 1983, I do still find myself using the phrase “gross me out!” on occasion. Weirdly, I almost never say it in reference to Martha Coolidge’s marvelous flick, but it does pop up in conversations with asset managers from time to time.
That’s right, if you’re a fund manager who has marketed your separate account, hedge fund or other offering, there’s a reasonable chance your pitch book might have barfed me out. Why? Gross returns, y’all. And I’m not talking about actual performance losses.
So many fund managers continue to show gross returns in their pitch books, and it makes me want to yell “Grody to the max!” during many a manager’s pitch.
Per GIPS standards gross-of-fees returns are “the returns on investments reduced by any trading expenses, including transaction expenses for real estate and private equity incurred during the period” while net-of-fees returns are defined as “the gross-of-fees returns reduced by investment management fees (including performance-based fees and carried interest).” GIPS goes on to say in another memo that “because fees are sometimes negotiable, presenting gross-of-fees returns shows the firm’s expertise in managing assets without the impact of the firm’s or client’s negotiating skills. Accordingly, firms are recommended to present gross-of-fees returns.”
Bag. Your. Face.
Look, I know I’m no one and GIPS is, well, GIPS. But seriously? It seems to me that showing net returns is the best measure of investment prowess since it proves you can (or can’t) both execute your investment strategy AND I dunno, put food on the table and pay your office rent, too.
Also, gross returns aren’t what an investor can actually attain in your fund since, and I’m just spitballing here, you probably aren’t going to start managing money for free. So, to be honest, gross returns are kind of like showing an investor something totally rad and then yelling “psych!”
Believe me, I do understand why managers may want to show the gross returns. Because they are net of fees they are, by definition, higher than net returns. They make you look so much more, like, gnarly (in the good way). But because the Securities and Exchange Commission generally asserts managers should show performance results net of fees (except in certain limited instances as defined by the Clover letter, for example) I find many fund managers succumb to both GIPS and the SEC guidance by showing investors gross AND net returns. Which, to me, is the worst of all possible worlds.
I mean, what better way to show an investor why cheaper is better, why they should negotiate their buns off for the lowest fee level possible or, I dunno, even just say screw it and go all passive or smart beta on you? Like, “here’s what you could have gotten if I wasn’t making money off you, Investor. But neener neener neener.”
And since, again per GIPS, “…firms are not specifically required to present gross-of-fees or net-of-fees performance but are allowed to present either, or both with equal prominence, as long as the returns are clearly labeled and accompanied by the required disclosures to help the prospective client understand how the measure(s) have been prepared” MAYBE, just maybe, you should consider showing the returns that offers the best proof of your worth and value as an active manager. I mean, wouldn’t that be totally radical, y’all?
I did get over my Nicolas Cage crush, by the way, and well before the disastrous mullet/wife beater combo of 1997’s Con Air, but I for sure continue to have just a tiny bit of Valley Girl in my redneck roots. And I’m begging you all: Stop grossing me out!
(c) MJ Alts
Like many folks these days, I rely on the interwebs to discover how to do certain things. Change the battery in my home alarm system? YouTube. Learn how to create a smokey eye? Instagram. Grill a turkey for Thanksgiving dinner? Jimmy-D’s Thanksgiving Turkey BBQ 2010.
Of course, these efforts are met with varying degrees of success. My recent foray into alarm-battery changing resulted in an unplanned visit by Nashville’s finest. All attempts at a smokey eye were followed by offers of domestic abuse support and/or temporary blindness. In fact, only the turkey grilling turned out the way I’d hoped, since the meal was both edible and guests remained salmonella-free.
It’s not just me. Lots of people think that mimicry is pretty easy. In fact, there are whole websites and videos devoted to cake disasters (can you even tell that’s supposed to be a Mallard Duck Birthday Cake I baked for a hunting friend of mine???) and other sites where people can post DIY fails for your enjoyment and moment of daily schadenfreude.
And of course, the investment industry can’t be immune to these sorts of shenanigans - we just aren’t that special. But in the case of investing, we usually refer to our attempts at mimicry as factors, and although we label these “smart beta,” in fact success rates can be just as varied.
Indeed, factor investing has become incredibly commonplace during my tenure in the investment industry. These days, I think I hear the words “well, couldn’t you just use the [value, quality, momentum, size, low vol, or any number of the other 300-plus] factor instead and do it for [5, 10, 20…] basis points?” in my sleep. The word “factor” has even started reverberating through my head sometimes like a Jan Brady “Marcia, Marcia, Marcia” redux.
Call me contrary, but any time an investment theory (or really any trend) is thrown around with this much impunity, it makes my Spidey senses tingle. Is it really possible that all investing can be boiled down to choosing the “right” factors and that generating returns can be so simple and cheap?
It turns out, maybe not. I read an interesting paper the other day, “Alice’s Adventures in Factorland: Three Blunders That Plague Factor Investing” (Arnott, Harvey, Kalesnik and Linnainmaa, 2019) that theorized that factor investing may actually underwhelm due to problems with data mining, crowding, trading costs, diversification and other issues that make it less than the “perfect” return generator it’s often mistaken for.
What’s more, because most factors are backtested over a long period of time (standard investment industry protocol, right?) there is a bit of smoothing that may be evidenced by the final factor-based product. In the paper, the authors highlight the performance of 14 popular factors from July 1963 to June 2018. During that period, the value factor exhibits negative correlation to the markets. So, one might believe that value is a diversifying factor in a portfolio. And it may be. Until it ain’t. “The value factor, for example, typically correlates negatively with the market. The paper actually concludes that “[d]uring the global financial crisis, however, the value factor correlated positively and significantly with the market, performing poorly as the markets tumbled and soaring as the stock markets rebounded.”
Huh. Whoda seen that coming?
I already had my suspicions about this prior to reading this paper, however, although they were admittedly less academically rigorous. These misgivings began to take root when factors became the quick answer for everything. Like a manager’s strategy? Let’s figure out the factors and do it cheaper! It’s esoteric? There’s still gotta be a factor we can use. Oooh…here’s some correlation in a single market environment – that will be perfect!
Look, I know that active management has taken it on the chin during this 150-plus month bull market. I understand that investors are increasingly price sensitive and replicating strategies on the cheap has great appeal. I even get that, at this moment in time, when a strategy may be highly correlated with a particular factor (perhaps because both are trending up), that factor investing may look too good to pass up.
But I do wonder, when the markets get tested and everything turns ass over elbows, whether we’ll be eating the perfectly grilled turkey I learned from Jimmy-D or that sad, parrot-looking mallard cake, complete with (no joke!) red velvet sponge. If you’re not at least wondering a teeny tiny bit the same thing, perhaps I need to ask Jimmy-D to host a video blog for us on the topic.
Photo from 123rf.com
A number (maybe 15 or so) of years ago, when I first emerged on the speaking circuit, I gave a talk about hedge funds to a CFA society in Texas. I presented an hour of education on the topic, touching on everything from Long Term Capital Management and blow up risk to fee structures, performance, asset allocation and portfolio construction benefits. At the conclusion of my formal remarks, I took a few audience questions.
At the very front of the room, a distinguished looking lady, somewhat advanced in years, raised her hand to lob the first query.
“Do you have your PhD?” she asked.
“No,” I replied.
“Do you have your MBA?” she inquired.
“No ma’am,” I answered a little more dubiously.
“Your CFA?” she persisted.
“Um, no ma’am,” I said somewhat sheepishly.
“Well, for someone with no education, you gave a marvelous presentation,” she smiled.
It was, is and perhaps always shall be the best backhanded compliment I’ve ever received.
It is kind of funny to think about that episode now. Had this lovely lady known about my evidently deficient education before signing up for the event, she might not have attended, and yet she professed to both enjoy and learn from my remarks.
Or maybe it isn’t so funny. In the investment industry generally, and specifically when it comes to fund managers, you often hear about pedigree. When a new fund launches, talk inevitably turns to where the manager went to school, where they worked, who they worked with and all of the check the box factoids that determine if a fund manager will be hot or not.
It’s become so commonplace to see a specific road to success (at least from a fund raising perspective) that it probably doesn’t even surprise you that 40 percent of venture capitalists went to Harvard or Stanford.Hedge funds also find a large number of their stars at Harvard and Stanford, too, but also frequent the University of Pennsylvania, Cornell and Princeton.
In truth, the emphasis our industry puts on pedigree can be a bit daunting for those of us who didn’t grace the hallowed halls of Harvard or Yale, or who never managed a prop desk at Goldman Sachs. It also may be costing us money.
In a study of venture capital firms, Harvard Business School (yes I’m now quotingHarvard, sue me), found that VCs that went to the same undergraduate school were 34.4 percent more likely to invest together, but the probability of their success (defined as an IPO for this study) actually declined by 19 percent if they both claimed the same alma mater.In addition, the chances of a successful IPO declined by 17 percent if the co-investors worked at the same firm, even if it wasn’t contemporaneously.
Likewise, a 2016 study by Oleg Chuprinin and Denis Sosyura (neither from Harvard) found that hedge funds run by individuals that grew up poor (bottom 20 percent of households in terms of wealth) outperformed those managed by managers from the top 20 percent by over 1 percent per year.I certainly can’t speak for everyone, but as someone who grew up “powdered milk poor” it never occurred to me to apply to Harvard or Stanford because, regardless of whether I could get in, I knew I couldn’t have paid for it. I’m betting some of these outperforming managers found themselves in the same (poor) boat.
And of course, all of this thoroughbred nonsense was magnified recently by the epic college entrance cheating scandal that unfolded in the US, which gave a glimpse into how pedigree can be manufactured if you know the right people and have enough money.
This wasn’t even news to me. Once upon a time, before I ever entered (or even thought of) the investment management industry, I helped research undergraduate applicants of means to determine if “special attention” was warranted in the admissions process. To my knowledge, there was no cheating or anything improper involved in the process – no one was provided admission that didn’t meet basic admissions criteria – but I do know that if it was a close admissions call, every effort was made to, um, clarify the situation before a negative result was delivered.
Look, I’m all for a good education, y’all. I certainly got the best one my powdered milk upbringing could afford, but I’m also not naïve enough to think that everyone has the same opportunity to go to Harvard or Stanford, and from there to Goldman or B-school. Sure, there are scholarships and opportunities out there, but their numbers are finite and what is covered varied.
And if the research shows that the vaunted pedigree that investors search for is actually a potential source of underperformance, then maybe it’s time to expand our horizons. As I’m sure many of you know, there are a ton of very good dogs out there, and not all of us have papers.
A few weeks ago, an industry friend came to Nashville for a meeting of the Mid-South Alternative Investment Association (MSAIA). When he told his (New York-based) work colleagues that he was attending the meeting to network with investors, he was met with laughter, derision and accusations that he was only gracing my fair city to meet chicks. After all, Nashville is the bachelorette capital of the country.We’re now known for having a surplus of both hot chicken and girls that go “Woooooooo!”
Despite the skepticism of his colleagues, my friend did attend the MSAIA meeting, where there were 51 attendees (larger than some conferences I’ve attended) including family offices, endowments and pension representatives. In fact, even though it’s not New York, the society as a whole boasts 700 members (including more than 200 allocators) from a number of cities around the Mid-South. Sure, we’re more likely to have our meetings at Maggiano’s than at Cipriani’s, but despite the mass market meatballs, there IS investor flesh to press and nobbing to hob.
Yet it seems that many (most?) people in the investment industry seem to believe there is no financial world outside of New York/Connecticut, Boston, Dallas, Chicago, Miami, Los Angeles, San Francisco and Washington, DC. And while it’s true you’re likely to find a larger absolute number of millionaires and more institutional investors in those locales, it doesn’t mean that other areas of the country are complete bereft.
In fact, if you really want to get down to the investor lick log, there are certainly states that have higher concentrations of wealth outside of the traditional marketing stomping grounds. Hawaii, for example, boasts 43.1 millionaires per 1,000 residents. Delaware has 34.7, more than New York or Florida, thank you very much, and Rhode Island, Utah and Ohio all outpace Texas in millionaires per capita, believe it or not.
It’s funny, but in investing it almost always pays to go off the beaten path. Whether you’re looking to grab a new private equity or venture capital portfolio company, where less competition means a lower multiple, or if you’re just bargain hunting in public equities or fixed income, finding unique opportunities (or at least finding them first) is generally perceived as a good thing.
However, when it comes to fund raising, despite how hard it is for so many fund managers (read: all but the largest of the large), taking a road less traveled isn’t looked upon as a sound investment. In point of fact, however, while there may be fewer meetings to be had away from major financial centers, but it can be easier to get meetings as neglected investors are often happy to see folks in their own offices, rather than traveling (yet again) to meet them in theirs.
To be clear, I’m certainly not advocating you spend all your time flying to flyover states, but if you can find a few good events (local investor meetings like MSAIA, Southeastern Hedge Fund Association, Texas Hedge Fund Association, larger CFA events and the like) and add on a meeting or two, it might just be worth the time, effort and almost inevitable chain restaurant food. Even a single investment from a jaunt like that more than pays for the trip, and that should be enough to make even the most jaded investment professional yell “Wooooooo!”
I know I'm a little late. Perhaps you're still nursing a love hangover from last week, but just in case you still feel like spreading a little tenderness and affection throughout the fund management industry, I've created some handy dandy cut out cards to help you express your feelings. Because nothing says "show me the money" like some old school, cut out cards with your name scribbled on the back, right? So share the love y'all!
(c) 2019 MJ Alts
I have to say, Facebook is getting disturbingly good at targeting ads. Lately my timeline has been populated by comfort items – cozy PJs, custom pillows that ‘guarantee’ a good night’s sleep, shoes without three-inch heels and even this random beanbag thing called a MoonPod. Evidently you buy one too many cards that reads “People, Amirite?” and the magic algorithms of Zuckerberg’s evil empire decide you need a little time out.
In this case, however, they happen to be right. I am tired. Exhausted. Plum tuckered, to use the language of my youth. Lately, I DO actually find myself in need of a mysterious bean bag chair that simulates weightlessness and helps to reduce anxiety and depression. And why I find myself in this state (and why I actually bought that effing MoonPod) is no real mystery. It’s people. Specifically, it is people in the investing industry.
You see, over the past several weeks, a couple of articles have been published that purport to explain why diversity does (or doesn’t) matter in the investing world. The first (in Barron’s) included comments from Jane Buchan that were based on a 2016 study by Rajesh Aggarwal and Nicole Boyson which found “funds with all female managers perform no differently than all male‐managed funds and have similar risk profiles” The second, which was cited in multiple outlets, including in the Financial Times with the incendiary title “Harvard Study Questions Benefits of Fund Manager Diversity,” was penned by Josh Lerner of, you guessed it, Harvard.
As someone who is active in the emerging and diverse fund manager universe, let’s just say the appearance of these articles means I’ve gotten A LOT of emails and DMs on the topic over the past few weeks. I’ve received enough, in fact, to turn my thoughts from acquisition of the Iron Throne to procurement of a freakin’ anti-gravity bean bag.
First, let’s set aside any issues I may have with the way various diverse manager studies are conducted. No study is perfect, including the ones I’ve done myself. However, there are some specific items that really butter my toast:
Single source data – Particularly in the alternative space, using a single data source is almost a guarantee for a small sample. Looking at the total manager counts in some studies is almost enough to make me buy a pair of comfortable shoes, especially since in a number of cases I can list more diverse funds off the top of my head than were included in the total sample.
Mixing social justice and behavioral finance – I get why studies use women- and minority-owned firms as a data set in performance papers, I just don’t happen to agree with it. One metric attempts to measure social justice (the existence or lack thereof of a level-playing field in fund management), while the other aims to quantify behavioral finance – how different subsets of people prosecute investing opportunities and whether these approaches are more or less successful. IMHO, in order to have a true picture of performance, you need to look at the full sample - all diverse fund managers regardless of their stake in the firm’s bottom line. You can still measure the existence of diverse fund ownership, just don’t conflate the two issues.
Focusing on fund performance – In the long-only space, for example, you may find a number of diverse investment managers who don’t have a mutual fund or CIT or other vehicle due to the costs involved and need for a seed investor. But isn’t their performance meaningful as well? Same goes in PE, where a number of diverse private equity investors work (at least initially) more in co-investing than in traditional comingled funds for the same reason. I know it makes it tougher to collect data, but ultimately the data would be more robust.
Looking only at averages – Many studies have found, including Lerner’s recent study, that even if averages are equal, that there may be a disproportionate percentage of diverse funds in the top performance quartiles. Seems like this is an important point, too.
But, leaving all that aside, what makes me most want to retreat to the MoonPod are the emails I get that say, “Huh, I guess diverse fund management ISN’T a thing.”
It’s funny (and I don’t mean HaHa) that I tend to get two responses to these studies when they come out. If a study shows outperformance for diverse fund managers, the default response is “Jackie Robinson.” I can’t tell you the number of times that someone says to me “Don’t you think that the real reason diverse managers outperform is because the fund management industry is so unwelcoming to women and minorities that only the best and brightest diverse managers survive, which is why they ultimately outperform?”
If, on the other hand, a study like Lerner’s or Aggarwal’s shows that performance of diverse fund managers is roughly equal to that of white male investment counterparts, I get the “Ginger Rogers” defense. “You know, if there isn’t outperformance in the diverse manager landscape…if the diverse fund manager can’t do all the same moves backwards and in heels…what’s the point?”
Robinson on the left of me. Rogers on the right. Here I am, stuck in the middle with you.
So it’s either the studies are skewed towards high performers, with the accompanying implication that when more, potentially less skilled, diverse fund managers enter the fray that said outperformance will be as ephemeral as my desire to wear flats. Or the studies show no significant outperformance, meaning that there is no reason to take a “risk” on someone whose personal appearance, background or fund management organization may look different.
But y’all. We are in the investing industry. We take risks every day. We are supposed to look at the available data and make a calculated calculation about whether or not a particular investment is “worth it.” But somehow we continue to miss the forest for the trees on this particular topic.
The lion’s share of the studies (NAIC, CityWire, Lerner, Aggarwal, BarCap, Babalos, Morningstar ,Rothstein Kass to name a few) that are available show that diverse fund manager performance (either within separate funds or in mixed gender teams) is equal to or greater than the total investment fund universe, effectively taking performance OFF the freakin’ table as a risk factor.
So, if performance isn’t a negative factor and, in fact, may potentially be a positive, what risks remain?
Mainly ones we are creating ourselves.
You see, in Aggarwal’s research, he found that funds with at least one female fund manager fail at a higher rate than all-male fund complexes. He notes that “management and incentive fees are much higher for all-male funds than all-female funds” and I can anecdotally say the same is true for minority-run funds. And both groups are almost always more willing to negotiate fees, too. When you combine this with the ample research that diverse funds tend to have fewer assets under management (AUM) than non-diverse funds (BarCap, Lerner, Aggarwal et al), and it is little wonder why these diverse managers don’t have the same robust operational infrastructure of their non-diverse, large fund brethren? A – they don’t need it at their size and B – they can’t afford it as they slash fees in an attempt to grow AUM.
Indeed, it seems like the market is looking for a perfect, shiny, definitive study that proves, beyond the shadow of a doubt, that diverse fund managers (along with two of my other fund management loves, emerging managers and ESG investing) consistently beat non-diverse funds in order to justify the “risk” of investing with them. A “risk” that would be mitigated if only more people were investing with them.
Calgon, take me away!
At the end of the day, I just don’t see studies saying diversity is a bad thing. I see studies saying it can be difficult to manage diversity. I see studies saying it can be uncomfortable for the team involved when differing opinions and viewpoints are brought into play. I see studies saying building diverse teams (or portfolios) can be tough. But diversity of thought and behavior is, I think, worth the impediments and small risks we take to get it.
I’d be willing to bet my MoonPod on it, y’all.
(c) MJ Alts
As I was driving past the park near my house recently, I noticed that there were a bunch of black-clad individuals in the open area all wielding foam swords, seemingly intent on beating the snot out of one another during a Live Action Role Play, or LARP.
LARPing was never my thing growing up. With the exception of the K.I.S.S. My-Anthia scene from Role Models, I never really saw the allure of the LARP. Sure, you got to pretend to be someone else for a few hours on a Sunday afternoon, but your chances of ousting the bigger dudes who spent all day plotting LARP power moves at the Burger Hole were still, at least in my case, pretty slim.
No, I instead set my childhood gaming sights on a realm where a last-picked-for-kickball kid could have a much more level playing field – arcade games.
Seriously, was there anything better than getting one of the arcade flat-top tables at the Pizza Hut on a Saturday and playing Ms. Pac Man to your heart’s content? Or spinning the bejesus out of that weird wheel controller in a furious game of Tron? Or even rocking a rollicking game of Elvira and the Party Monsters pinball?
But one of my all-time arcade favorites had to be Frogger. It had everything an 80s kid could want: 18-wheelers (for your Smokey and the Bandit fixation), unsupervised time playing in the streets (at least until the streetlights came on) and a tiny hint of road kill gore.
Frogger was, in a word, awesome.
Perhaps not surprisingly, with everything that’s going on in the markets (and, honestly, in the world in general), Frogger has been on my mind a fair amount of late. For those of us involved in the markets, there may be no better metaphor for what we’re now experiencing on a daily basis. Fed hikes whizzing by. Missed earnings squashing investors like the most inconsequential frogs, toads and newts. Political intrigue lurking like an alligator under a passing log. Crowded investments pushing investment traffic to the critical level.
While some continue to predict years of bull market conditions, I’m a little less sure of what’s going to happen. It sure seems to me like there’s a lot of obstacles for Frogger to navigate, perhaps more than those with even the most skillful joystick can manage. But while my Spidey senses are definitely on high alert, I do make a point of not making massive market predictions. Instead, I look at investing as I would any endeavor where having a legit and reproducible strategy can keep you hopping when things get rough.
So what’s a jittery investment amphibian to do?
1) Don’t make too many sudden moves: Making decisions based on short-term trends, information or fear can seriously impede a successful investment strategy. Perhaps one of the reasons why the average hedge fund barelyedged the S&P 500 in 2018 is because some managers had given in to the fear of losing assets and adjusted their strategy to capture more gains in the bull market environment, only to be caught with their proverbial pants down when things went sideways in the 4thquarter. The best investors (IMHO) set a long-term investment strategy and, aside from tweaks to deal with evolving long-term trends, try to avoid making significant changes along the way. Of course, in order to successfully pull this off one must…
2) Recall that everyone and every investment strategy will post losses at times: For example, on an asset weighted basis, macro hedge funds were one of the top performing strategies in 2018 after years of pretty disappointing returns. In fact, some funds topped returns over 10%, 20%, 30% or even 40%, despite a loss of some investor confidence in prior years. In contrast, equity hedge funds were one of the top performing strategies in 2017 and, with the exception of healthcare and technology sector funds, were among the worst performers in 2018per industry watcher Hedge Fund Research. We’re all indoctrinated with the phrase “Past Performance Isn’t Necessarily Indicative of Future Results” from our first day in this business, and God knows that’s true. Today’s winners may be tomorrows loser and vice versa. The key is to determine if you still have confidence in the strategy (and in the person executing the strategy if you’re an investor). If you do, the rest is mostly short-term noise. In fact…
3) Sometimes information isn’t your friend: During every period of market volatility I’ve lived through, and there’s been some doozies at this point, I see an uptick in investor calls and emails. Some investors may increase their check-in frequency a little, perhaps from quarterly to monthly or from semi-annually to quarterly, but some investors really turn up the heat. I can still remember periods in my career when some investors expected full transparency and returns on a daily basis. As a geek, I generally applaud the urge to gather information. But in the case of investing, if you adhere to points 1 and 2 above, that information doesn’t do much but cost you sleep. In fact, if you’re invested in less liquid strategies like hedge funds, private equity, venture capital or real estate, you’re likely literally paralyzed by fund terms and redemption policies anyway. It must be like being awake during surgery – you get all the pain but none of the ability to make it stop. So before calling a manager to get information for the 10th time, think about what you’re logically going to do with that information. If there isn’t any action - or at least not any rational action - you can take, why bother?
In short, now that we’ve seen a little carnage out in the markets, it’s time to really think about who you trust with your money. Rather than get tied up in your underpants trying to predict the almost certainly unpredictable, spend some time reviewing your investment strategies, asset allocation and manager line up. How diversified is your portfolio? What experience do your portfolio managers have with volatility and even bear markets? What’s your worst-case scenario, assuming all correlations go to 1? If there are areas that make you particularly nervous, now might be the time to think through them, before the fit really hits the shan, whether that’s tomorrow or in two years. That kind of preparation and intestinal fortitude may just keep you and your portfolio from getting squished down the road.
A new holiday fad for fund managers of all ages and denominations! LP On A Shelf (or ELP on a Shelf, as I call him) knows when you've been spending too much time at conferences, when you're creating pitch books that are too long, or when you're not hiring critical personnel (or skill sets) and will tell Santa not to offer you an allocation in the New Year.
Many of the fund managers I speak to remain conflicted about how best to position their diverse asset management firm. While I don’t have all the answers, perhaps I can help shed a little light on the topic for folks. Read this while you’re thinking about your capital raising battle plans for 2019. And may it help you separate who’s been naughty and nice, whose chimney you should visit and whose you should skip in the New Year.
Have you been thinking about joining Twitter to expand your investor and investment professional network? Have you been lamenting your lack of Financial Twitter (“FinTwit”) savvy? Are you hoping to take a break from reading incendiary political Tweets to actually put Twitter to use for brand building and marketing purposes?
Well, here’s your chance to learn all you need to know to get started and make the most of Twitter. Take my tour of the FinTwit campus and come on in…the water’s fine.
