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!
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
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.
(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.
In January of this year, I was asked to speak at the 2018 TEDx UIUC event "Roots." The theme of the event was pretty straightforward - "The beginning of all things are small" (Cicero). The organizers asked me to talk about both my professional journey and the work I do around diversity in finance/investing.
First, I was very flattered.
Then, I *may* have pooped my pants a little at the thought of giving a TEDx talk.
Ultimately, I of course accepted. And on April 22, 2018 I gave my talk to about 400 students, faculty, members of the Champaign-Urbana community, my mom, and Jill Kimmel (yes, THAT Kimmel).
If you've got just under 20 minutes, I hope you'll take time to watch it. If you like the message, I hope you'll take time to share it. If you utterly hate it, let me know and I'll send you a personal note of apology for the time wasted AND I'll try to prevent my mom from sending you hate mail, too.
I miss Entourage.
To this day, I’m not sure there was much better than watching Ari Gold lose his collective crappola and yell hysterical insults at people. Listening to Ari’s invective was like giving my id a voice. Sure, it was obscene, profane and probably actionable abuse in many cases, but that’s why it was so much better to watchsomeone else spewing that hilarious filth than to let my own inner Ari Goldout to play.
Vulgarity aside, I also enjoyed watching the agent-principal relationship that Ari had with Vincent Chase. Sure, Vinnie ultimately called the shots, but Ari brought moola and industry know-how to the table. It was, despite a brief firing at the end of Season 3 (and the entire “Medellin” disaster), an almost perfectly symbiotic relationship.
In many ways, you see that same principal-agent relationships play out in the investment world (minus the copious swearing). In fact, I content that all investors can be classified as either principals or agents, or as some hybrid blend of the two, and that it’s critical to know which one you’re dealing with at any given time.
If you’re a money manager on the prowl for assets under management, knowing whether you’re interacting with a principal or agent can save you time, energy and headaches. If you’re an investor looking for a new role, understanding and explaining whether you’ll be a leading lady/man or Ari Gold can help manage expectations down the line.
Investors who are principals usually have some traits in common:
Investors who are agents also have traits in common:
(c) MJ Alts
Obviously, there are benefits and drawbacks to working with both agents and principals when it comes to investing. The only real drama comes from not knowing with whom you are dealing and therefore not effectively managing expectations (and resources).
For example, if you’ve got a truly niche-y and innovative strategy that perhaps is a bit untested, presenting it only to agents may pay off, but it will likely be a long slog and you may be stopped out entirely if your strategy can’t handle large allocations. Or if you have a strategy that is more of a new twist on an old tale, Aquaman 2for example, you may find that high net worth individuals aren’t sufficiently wowed by your offering. If you need to get to a quick close, or if you only have limited capacity left before your final close, landing a prime role with an agent may not be possible. But if you’re looking for a large anchor, or if you have enormous capacity and the time to run the agent gauntlet, these investors can provide the bulk of your capital.
And to make matters worse, some agents present as if they were principals, and principals can suddenly bring an agent to what you thought was your fund’s premier. It would be so much easier if there was just a script the industry could stick to, but unfortunately, you just have to try to learn everyone’s role and trust that if there’s some confusion, you can just hug it out in the end.
During this holiday week, declare your independence from investment industry stress and worries. Let your cares float away as you enjoy this guided meditation designed for busy investment professionals. Namast-CFA.
(C) 2018 MJ Alternative Investment Research. All Rights Reserved.
(C) 2018 MJ Alts
(c) 2018 MJ Alts
(c) 2018 MJ Alts
(C) 2018 MJ Alternative Investment Research
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.”
(c) 2009 Paramount Pictures
It seems like only yesterday that I started my career in alternative investing. Actually, it was nearly 20 years ago, a fact that hit home as I sat this weekend facing a birthday cake that was more inferno than Instragramable. I thought back to my first job at Van Hedge Fund Advisors as an entry-level hedge fund analyst in 1998 and wondered where the time had gone, when my eyesight went to hell in a handbasket, and how random it was that a “want ad” advertisement led me into what I think has been a pretty good career run.
I also thought back on how much I didn’t know at the time. I had researched stock transfers and HNW individuals during a stint at Vandy, but I honestly knew crap all about the industry or the funds I had been hired to research. So I spent some time over the weekend, in between massage appointment, birthday food and champagne binges, and a mild mid-life crisis, thinking about the advice I would have loved to have had in my salad days in the industry. So without further ado, and in honor of my four-plus decades here on Earth, here are the top four things my current self would love to tell my young self, assuming I could do so while avoiding any universe ending temporal paradoxes.
4) It’s better to know what you know not – As I mentioned, when I got my first job in the industry, I knew literally nothing. I was a sponge. I asked a ton of stupid questions. I read everything and sat in on every meeting that would have me. I felt like a complete moron at times, but I learned a bunch of useful stuff. I also observed other people in the industry and realized that there were four basic categories of alternative investment professionals: Those that knew not and knew they knew not. Those that knew not and knew not they knew not. Those that knew and knew not they knew. And those that knew and knew they knew. I’ll let you guess which groups tended to do better over the long haul.
3) Most hedge funds don’t blow up – I started my job with Van in May 1998, mere months before Long Term Capital Management blew up. When that happened, I freaked the hell out. I thought I had made the worst career move ever and wondered aloud, in front of the CEO of the firm (did I mention I was a moron?), what I had signed up for. In the intervening years, I’ve noted that hedge fund “deaths” remain fairly steady year over year (between 900 and 1,000 funds “die” in any given year), and that the vast majority of these closures are like watching the world’s slowest moving train wreck. You can see the bad performance piling up. You can see assets trickling out. And usually over a period of a year or more, the fund either converts to a family office or announces “there’s no good opportunities in the strategy anymore” and shuts its doors. Sure there have been spectacular blow outs in my 20 year tenure (LTCM, Manhattan, Maricopa, Bayou, Madoff, etc.), and some of these have been frauds, but generally speaking, with some added diligence and a decent redemption policy (and reasonably liquid assets) you can get out of the way before becoming pink mist.
2) Unhedged index returns are about as useful a one legged man in a butt kicking contest - About once per quarter, I see a headline either asking if the latest hedge fund liquidation means hedge funds are going extinct, or announcing that hedge funds “aren’t dead yet,” which always makes me start talking in my best Monty Python voice. Look, I get it. There’s pressure on fees. Performance hasn’t been awesome during this remarkable market run, but then again, that’s really not the point. I used to freak out when people challenged me with the S&P 500 or, back in the day, the NASDAQ’s returns. But then I realized that index returns don’t mean bupkis. Investors who are looking for pure beta should invest in beta. Investors who are looking for diversification or hedging or assets off the beaten path should consider hedge funds. Don’t believe me? Despite underperforming the indices, a Preqin survey showed 45% of hedge fund investors had matched their expectations through June. Investors that want to get it, get it.
1) A good review and understanding of leverage, liquidity, concentration, transparency, complexity and hedging will save you from strategy blunders 90% of the time. The rest of the time you need to understand the manager’s psyche (are they confident or overconfident or a sociopath) and/or specific market scenarios to avoid getting your butt handed to you, performance-wise. Spend your time on evaluating these factors and you’ll have pretty good luck picking funds. If you get too bogged down in checklists, you can miss the big stuff.
Oh, and a few to grow on: Never eat salad before you give a talk. You’ll never look as good in a bathing suit as you do at 20-something so go to the pool at conferences and quit being a wuss. Never order the chardonnay at a conference cocktail party unless you want your tongue to literally itch from all the oak. Don’t overuse “reply all” unless you really want to piss people off. Don’t be afraid to tell managers and investors no. And if a return steam seems impossible to achieve, run.
(c) 1988 Bull Durham
Anyone who has spent any time talking to me or reading my blogs knows I love a good movie. Although I don’t see as many as I’d like these days, I love how a film can transport you, inspire you, create emotion and just generally entertain. I even use the love of a particular film as a kind of odd litmus test in friendship, business and dating situations. Did you adore Forrest Gump? Yeah, that makes me seriously question your judgment.
But some movies stand out more than others in the MJ Pantheon of Favorite Flicks. Star Wars (the original trilogy, natch), Shawshank Redemption, Argo, Bridesmaids, The Blind Side (don’t judge me), The Wolf of Wall Street, The Princess Bride, 50/50, Raiders of the Lost Ark, Rudy, Love Actually, Aliens, The Terminator (1 & 2), Die Hard and Pride & Prejudice (the 2005 version) are just a few of my all-time faves.
And of course, there’s Bull Durham. Though I’m not a huge fan of baseball (too slow, lots of spitting, often hot), I loved that movie when I first saw it at the ripe old age of 18. It was my first sophisticated on-screen romance, which had theretofore been populated by teen sex films (e.g. Porky’s), John Hughes offerings (Pretty in Pink, Sixteen Candles) and saccharine Disney scripts.
When Kevin Costner’s Crash Davis gave his epic speech during Annie Savoy’s, ahem “tryout” between Crash and Nuke LaLoosh (Tim Robbins), Susan Sarandon wasn’t the only one who sighed “Oh my…”
In case you haven’t seen Bull Durham since it’s original 1988 release (sacrilege!), here’s the scene in question. (And you may not remember this, but it is officially NSFW.)
Since we’re nearing the end of summer, I decided to watch my one and only cinematic homage to baseball over the long Labor Day weekend. It got me thinking about what I believe in when it comes to life and investing, and it wasn’t long before I was on an epic, Crash Davis-esque rant.
“I believe in manager skill. That checkbox due diligence only works if you also have a high EQ for evaluating people. That generalists and specialists should work together to combine the best aspects of myopia and a more holistic, 30,000-foot view. I believe that people who call themselves long-term investors, but who regularly redeem in less than 24 months, are full of crap. I believe that managers who say they can’t find diverse job candidates either exist in ridiculously insulated bubbles or have no imagination. I believe that having less than 10% of hedge funds, mutual funds, venture capital and private equity funds managed by women – who comprise 50% of the population – means we’re missing out on some amazing talent. I believe if all investment managers and all investors agreed to always interview a diverse candidate for jobs/fund searches, it would go a long way towards adding cognitive and behavioral diversity to the industry.
“I believe in downside deviation, maximum drawdowns and time to recovery. I think standard deviation is silly. I believe most investors don’t worry about upside volatility, but that out-of-character positive returns should trigger a monitoring phone call as fast as a losing month. I believe in macro funds, commodity trading advisors and short selling strategies, and that investors should consider these strategies before the proverbial shit hits the investing fan. I think hedging with index options isn’t real hedging, and that taking 8 to 12 months to complete due diligence is like wanting to get pregnant without risking actual sex.
“I think investment conferences should improve the quality of their cocktail party wine. That you should NEVER order the vegetarian option for lunch at an event unless you have a desire to eat something that looks like road kill. I believe in polite but persistent marketing. I think that if you focus on your expertise instead of a sale, you’ll amass greater assets under management (AUM). I believe you should always check time zones before calling a prospect or client, and that texting is NSFP (Not Suitable For Prospects).
“I believe in differentiated networks, niche strategies and cognitive alpha. I believe in gut feelings and spidey senses about people, markets, and investments. I believe in contrarians, and in sticking to your investment guns, as long as you periodically re-visit your thesis to ensure you’re not just stubborn. I believe going to cash takes testicular fortitude. I believe getting back into the market does, too. I believe in good business cards, firm handshakes and not approaching prospects in the bathroom.
“I believe that those funds that don’t get into responsible investing/ESG now will be licking AUM wounds in years to come. I believe that all investment managers make mistakes, and that admitting mistakes and ensuring that they don’t happen again is a mark in a manager’s favor. I believe in strategy continuity, but not necessarily in strategy drift. And that past performance isn’t indicative of future results, but it beats knowing nothing about how strategy translates into returns.
"I believe that most meetings could be emails, and those that cannot should be limited to one hour, tops. Oh, and any meeting that goes longer than one hour should involve snacks.
"Finally, I believe in small funds. New funds. Large funds. Old funds. Women run funds. Minority run funds. White guy run funds. Bread and butter funds. Niche funds. Liquid funds. Illiquid funds. And contrarian funds. I believe there is manager talent and fund utility in all types of funds, and that only by looking at the full menu can investor's hope to have a balanced portfolio meal."
Oh my!
So get back to work all. I hope you enjoyed my little investment rant…pith in the wind if you will. Maybe it will get you thinking about YOUR investment beliefs as we ramp back up into what I think could be a certifiably crazy fall market. Oh, and if you have an investment belief or rant of your own (or a good movie suggestions), feel free to sound off in the comments below.
