Don't Go Changing...
Source: JP Morgan Prime Finance
It’s true that I grew up in the deepest South, but I’ve never been a country music fan. Sure, I loved the Oak Ridge Boys tune “Elvira” when I was 11 years old, but who can resist a song with such catchy lyrics as “Giddy up oom poppa omm poppa mow mow”? I soon moved on, however, branching out into Duran Duran by age 12, Howard Jones by age 14, and the Beastie Boys by 16.
Somewhere along the way, I also developed a weird fondness for Yacht Rock. Steely Dan, Christopher Cross and Toto go really well with the captain’s hat I keep far back in the depths of my walk-in closet. Even today I’ll make time to see Yacht Rock Revue if they come to town, just so I can get down with my smooth self. I even kind of liked Billy Joel, despite the fact that he was always perceived as a “Yankee” amongst my Southern peers, and therefore was not in heavy rotation at any of my childhood soirees. I did get my Billy Joel fix weekly while watching Bosom Buddies, but otherwise my exposure to and fondness for the Piano Man is a bit of a mystery.
What isn’t mysterious is why Billy Joel has been on my mind of late. Recent market volatility got me thinking that this may be the moment for hedge funds to shake off eight-plus years of long-only index comparisons and get their groove back.
Of course, the downside volatility in the market proved to be short-lived, so that wish was short-lived, too. And then I saw a report by JP Morgan Prime Finance that indicated hedge funds had increased their long exposure JUST BEFORE the market briefly melted down.
Nooooooooo!
So now I go from hoping hedge funds could engage in a little comeback schadenfreude to hoping they didn’t lose their asses during the first few weeks of February. I guess we’ll know how they fared in a couple of weeks when performance numbers start to trickle in.
In the meantime, here’s my little pep talk for all you hedgies out there, inspired by Billy Joel: Don’t go changing…
Seriously, folks, I know it’s been a tough eight years of redemptions and fee compression and “why can’t y’all outperform the S&P 500” headlines and “sell your private jet” provocations, but you’ve got to stick with it. Otherwise, all those times we’ve (I’ve) patiently explained diversification and correlation and how hedging is a drag in an unchecked bull market but provides valuable insurance in a market correction will be as crap-infused as “We Didn’t Start The Fire.”
Let’s face it, there are a finite number of things you can control in the world of investing, so I implore you to control the one thing you always can: your strategy.
You can’t control the markets and you can’t control your investors and prospects.
The markets will go up and down no matter what you do. They could keep going up (somewhat irrationally in my opinion) for another year or two, or everyone could be in the pooper tomorrow. Investors may redeem when performance is bad and, frankly, they may redeem with the going is good. In 2008-2009, a number of funds that performed well received redemption requests because it was only those funds that had sufficient liquidity to pay redemptions in full. You have zero say in either of those things, so there is likely little point in trying to adjust for them.
I know it must be tempting by now to “go with the flow” and get some relief from what has been a pretty painful period for some, but please, please, don’t go changing. “I took the good times, I’ll take the bad times. I’ll take you just the way you are.”