Your Fund Is Grossing Me Out!

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!

The Fact(or)s of the Matter

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. 

How Much Should You Sweat(er) Fees?

This past Saturday was not unlike most of my recent Saturdays. I woke up around 7:30, fed my  seemingly perpetually starving Siamese cats, and contemplated the end of what was yet another *fabulous* infrastructure week here in the good ole U.S. of A, all before heading out to stress shop. 

I’ve always said that shopping is my main form of cardio, but you may not know it’s also one of my favorite methods of stress management, too.  There’s something about a perfectly climate-controlled dressing room, a commission-based sales rep at my beck and call, and an impeccable frock (or purse, pair of shoes or new iPhone for that matter) that makes everything bad in one’s life feel more like a distant land war in Asia, rather than like a bar fight in your living room.

This weekend, as I was trying on my potential retail spoils, I happened to overhear a conversation in the dressing room adjacent to mine. A mom and a daughter were discussing a sweater, and whether it could be purchased for less money at another store. The objectionable price of said sweater? $30. 

Yep you heard me (read me?) – thirty whole American dollars.

My first thought was “You can buy a sweater for 30 bucks?!?”

I mean, I was at the Nordstrom Rack (I may be seriously into retail therapy, but most of the time I see no reason to pay full price for it), but I can’t recall the last time my hands have alighted on a $30 anything, much less knitted goods.

My second thought was “Would you really want to wear a sweater that could be purchased new for $30? What would said sweater be made of? What would this sweater look like? Would this sweater hold up to normal use without starting to resemble Rachel McAdams’s shirts in “Mean Girls?”  

(C) Morguefile.com

I was really struck by two things in the aftermath of the sweater discussion: First, what a privilege it is not to have to worry about spending $30 on a sweater. But second, and more important, how a lot of us have pretty much started to expect everything to be cheap. 

Especially when it comes to the investment world.

It’s true that there has been a colossal amount of fee pressure and compression in the investing world over, say, the last 10 to 20 years. For example, active equity mutual funds charged an average of 1.08 percent in 1996, but a mere 0.82 percent by 2016, and equity index funds saw fees plunge from 0.27 percent to 0.09 percent over the same period.[1]And of course, Fidelity upped the low-cost ante even further this year when they announced two no-fee index funds (Tickers: FZROX and FZILX), attracting more than $1 billion in their first month.[2]

One of the investing groups to get the biggest full-court (fullest court?) fee press is hedge funds. In fact, a mid-September Institutional Investor article touted that hedge fund fees had fallen to record levels, with management fees near 1.43% and incentive fees hovering around 17%.(3) Of course, this massive “decline” assumes that hedge fund fees peaked, as often advertised, at 2% and 20%, which I have loudly and repeatedly asserted for years that they didn’t, based in no small part to research that I did in 2010. 

This research showed that, at the height of hedge funds’ popularity, and based on a sample of more than 8,000 funds, management fees for funds that launched in 2009 averaged 1.65%, up from 1.35% for 2000 vintage year funds. Likewise, incentive fees during the period were largely stable. They clocked in at 18.7% for vintage year 2000 funds and dropped to 18.5% for hedge funds launched in 2009. So, while there has been a decline in average headline fees (the fees charged per Offering Documents, not negotiated for large investors, longer-lockups or founders’ shares), it hasn’t been a dramatic as one may think. 

But the bigger question that many have asked is “how low can fees go?” And that, much like my $30 sweater conundrum, is an excellent question.

The rise of index tracking, low-cost ETFs, and the decade of stellar performance of the same, has led some investors to believe all returns should come cheap. But even leaving aside market cyclicality and the active/passive debate, there’s a pretty big difference between mammoth firms like Fidelity or Vanguard offering funds for three basis points and a $100 million hedge fund, private equity / venture fund or even most long-only active managers offering the same. 

Why? 

The primary issue is economies of scale – Vanguard managed $5.1 trillion (with a “T”) as of January 2018. Blackrock managed $6.317 trillion (again, with a “T”) as of March 2018. Fidelity managed $2.45 capital T trillion as of the end of 2017. If Fidelity charges an average of three bps on its assets under management, it still generates a helluva lot (with an “H”) in fee income. 

If Jo Schmoe Fund does the same while managing $100 million, they spit out a paltry $300,000 in revenue. Even if Jo earns a hefty return on investment, triggering the payment of an incentive allocation, that still may not be big enough dollars to run an institutional quality business. 

Even if JS Capital Management manages to grow assets to ONE BIIILLEON DOLLARS, they might be able to buy a metric crapton of $30 sweaters charging 3 bps, but running a legit asset management business? I wouldn’t always count on it. Sure, they’d rake in $20 million on a 10% performance year (assuming a 20% incentive allocation), but not every year turns out that way. 

There are some years, thought we may not remember them well, where it would be considered outstanding performance to be flat. There are some years when a strategy just isn’t in favor. There are some years when stuff just doesn’t go your way. Do you want to incentivize a manager to use excess leverage, to under hire, to spend all their time trying to raise additional assets so they make a decent buck, or to take undue risks with your capital?

I’m not sure I do. Which is why I didn’t pop my head out of the dressing room to snatch up the mysteriously alluring, though inexpensive $30 sweater on Saturday. The risks of contact dermatitis, catastrophic sweater failure and potential public ridicule were just too great. 

[1]https://www.ici.org/pdf/per23-03.pdf

[2]https://www.cnbc.com/2018/09/04/fidelity-offers-first-ever-free-index-funds-and-1-billion-follows.html

https://www.institutionalinvestor.com/article/b1b0wqn4k95f20/After-Years-of-Cutting-Fees-Hedge-Funds-Say-Enough-is-Enough

The Poetry of Investing

It seems as if everyone has been pretty focused on Tweets, hashtags, and the general dumbing down and coarsening of communication of late. So I thought this week I'd inject a little culture into my investment blog. What if investors and fund managers could only think or talk in Haiku? The sentiments would likely remain the same, but the delivery might be much more civilized. So here you go: investor and manager haikus. Feel free to add your own in the comments section.

Investor Haikus

Seasons change, my phone

Keeps ringing. The same number

Calls. Persistent funds.

Not the best idea

To use diligence checklist

On the kids’ playdates.

Must I disclose this

Doughnut to compliance or

Can I eat it all?

Can’t wait to discuss

Fees with the trustees at our

Next board meeting. Yay.

I don’t want to shake

Hands while grabbing paper towels

In the bathroom. Gross.

 

Manager Haikus

Fall becomes Winter,

And I find myself stuck in

Endless diligence.

Performance is great!

This sector is hot! So why

Don’t people subscribe?

Do you want info

On my investment fund? No?

Maybe tomorrow?

Families, pensions,

High net worth peeps, endowments.

Lather, Rinse, repeat.

Competitive edge?

It’s our process and people!

Oh. You’ve heard that one.

Getting Jiggy With It

Music is an important part of my daily life. Whether I’m ignoring other passengers on a plane whilst rocking out under my favorite Beats by Dr. Dre headphones, dancing out a bad day in my kitchen, or scaring little kids at the ice skating rink with my early morning musical selections, the music I listen to is a great indicator of my mood and a reasonable barometer for my life at any given time.

In fact, many of my regular readers have noted that there is almost always a song lyric hidden somewhere in my blog postings, and I have even occasionally been challenged to work in specific lyrics - a challenge that is almost always accepted, by the way.

It’s perhaps no surprise then that as I was winging home from yet another conference on Friday afternoon, I began to think about my various fund manager and investor conversations over the prior two days and decided that maybe what the investment industry really needs is a playlist.

That’s right, we all need a break from chasing capital, being chased for capital, due diligence, the low return environment, watch lists and pitch books, so why not get down and get funky? 

So without further ado, here are reasonably comprehensive musical stylings for nearly every fund manager and investor mood. The song list and use cases are below, and I’ve even created a Spotifly playlist for those of you who want to break out your best Carlton Banks dance moves. 

“Money” - The Flying Lizards – For both investors and fund managers, because isn’t that what this business is all about?

“I Need A Dollar” – Aloe Blacc – For pre-launch fund managers in search of their initial funds.

“Please, Please, Please, Let Me Get What I Want” – The Jealous Girlfriends – For any fund manager about to go into yet another meeting after a string of ‘maybe in 6 months, in 1 year, when you get to XX dollars.’

“Uprising” – Muse – Been blocked out of an opportunity by a gatekeeper or a bigger fund? This song will build your motivation to overcome them and succeed.

“Price Tag” – Jessie J – Been blocked out of an opportunity by a gatekeeper or a bigger fund? This song may help you keep that loss in perspective and your blood pressure in check.

“Patience” – Guns-N-Roses – Investors should have this playing in the background as fund managers wait in the conference room…

“How Soon Is Now” – The Smiths – …while fund managers who are on their third, fourth or fifth meeting in months hum this under their breath.

“What Have You Done For Me Lately” – Sharon Jones & The Dap Kings – Question that should be asked by every investor to their long-time funds.

“Shake It Off” – Us The Duo – Get a bad due diligence rating from a consultant? Fix the problems and shake it off.

“Every Breath You Take” – The Police – How every investor I know feels at the end of a conference.

“Just Got Paid” - *NSYNC – You got an allocation! Woot!

“Mo Money, Mo Problems”  - The Notorious B.I.G. – Sure it’s great to gather more assets under management, but as you do, you’ll have to spend more time thinking about your business, operations, compliance, staffing, etc. And it may be harder to generate returns. Being bigger isn’t always glamorous. (Explicit Lyrics)

“Money For Nothing” – Dire Straights – What anyone outside of the investment industry probably thinks about your job.

“Billionaire” -  Travie McCoy & Bruno Mars – The morning prayer of every emerging fund manager. (Explicit Lyrics)

“Did I Shave My Legs For This” – Deena Carter - For any investor who’s walked out of a meeting with a fund manager that was ridiculously off the mark based on size, performance, fund age, experience, drawdowns, strategy, etc. That was an hour of your life you’ll never get back.

“Fighter” – Christina Aguilera – When an investment you thought was great, isn’t.

“I’m Still Standing” – Elton John – When you are coming back from a drawdown.

“Everybody Knows” – Concrete Blonde – When you’ve been trying to gather assets for months and keep seeing bigger funds get bigger, even if your performance is better. This one may require a stiff drink.

“Somebody’s Watchin’ Me” – Rockwell – Oh the joy of being on an investor’s or consultant’s watch list.

“Extraordinary” – Liz Phair – You know that if investors ever got to know you, they’d want to give you money!

“Holding Out For A Hero” – Bonnie Tyler – Investors see hundreds of funds a year – this should be playing as they walk down the hall into yet another meeting.

“We Are The Champions” – Queen – When you get your first institutional allocation.

"Don't You Want Me" - Human League - When an investor or gatekeeper won't take your calls or schedule a meeting with you. ('You know I can't believe it when I hear that you won't see me...')

“Have You Met Miss Jones” – Tony Bennett – When you read my blog postings. 

Got suggestions for songs I didn’t include? Sound off in the comments below. And happy listening!

BINGO!

As we commence another year of the great capital raising dance, I thought it would be fun to channel all of the back and forth, yes and no, hide and seek frustration into a little game. One that harkens back to a happier and simpler time, and one that anyone who has ever been under 12 or over 60 is familiar with.

So yes, ladies and gentlemen, this year we're gonna play a little Capital Raising BINGO. Simply print out the appropriate investor or fund manager card below and mark off (and date) each time you get a designated response.

The first investor who gets a BINGO can draft me as a single-use meat shield at an event.

The first fund manager who gets a BINGO will also get a prize, custom tailored to the fund in question. 

Happy capital hunting! And may the BINGO odds be ever in your favor!

(c) 2017 MJ Alts

(C) 2017 MJ Alts

Good Riddance 2016, Hello 2017!

Well, 2016 has been one helluva year. Between the celebrity deaths (Bowie, Rickman, Prince in particular), fake news, election chaos, Zika, creepy clowns, Aleppo, and a host of other miserable events, I know I won’t look back on 2016 with anything remotely regarding fondness. In fact, I may pretend this year didn’t even happen, therefore reducing any future therapy bills and bolstering lies about my real age.

But alas, as much as I wish I could be Queen of de-Nile, I’m afraid 2016 did happen, and I have the blogs to prove it.

So if you need a good year-end chuckle to survive the holidays, the Electoral College vote, or your boozy office fete, or if you’re just craving random info and snarky rants about the investment industry, I’ve got just what the doctor ordered.

Here’s a complete wrap up of all my blog postings, by topic, for 2016. Enjoy them while you rock around the Christmas tree, drink your Gin and Tonica, or however you plan to celebrate the season.

See y’all next year!

Hedge Funds (Don’t) Suck

http://www.aboutmjones.com/mjblog/2016/11/1/killer-kittens-the-decline-of-hedge-fund-returns (Why you’re more likely to be injured by your toilet than get busted by the SEC)

http://www.aboutmjones.com/mjblog/2016/9/6/you-cant-handle-this-hedge-fund-truth (Perception versus reality in the world of hedge funds, told with pictures)

http://www.aboutmjones.com/mjblog/2016/5/17/hedge-fund-truth-dont-believe-everything-you-read (Animated blog about hedge fund fees, returns and the so-called talent shortage)

http://www.aboutmjones.com/mjblog/2016/2/29/the-hedge-fund-headline-predictorator (Using hedge fund headlines (13-Fs, Rich List, etc.) to tell time and seasons)

http://www.aboutmjones.com/mjblog/2016/2/22/person-or-people (Why we tar the investment industry with a big brush, and how that can hurt performance in the long run)

http://www.aboutmjones.com/mjblog/2016/9/20/can-this-hedge-fund-relationship-be-saved (The hedge funds people fell in love with 2000 to 2002…well, they’ve changed…)

Behavioral Finance

http://www.aboutmjones.com/mjblog/2016/8/16/thank-god-what-you-see-isnt-all-there-is (The bias of “what you see is all there is” and why that makes us think returns are lower than they are)

http://www.aboutmjones.com/mjblog/2016/7/19/great-expectations (Matching investor expectations to reality. Matching money manager expectations to reality)

http://www.aboutmjones.com/mjblog/2016/8/2/a-picture-is-almost-worth-1000-words (Truly terrible drawings that illustrate the “streetlight effect” and how we end up looking in the wrong place for strong performance)

Diversity And Investing

http://www.aboutmjones.com/mjblog/2016/11/15/lenny-bruce-is-not-afraid (A post election blog that covers the importance of diversity, ESG, thinking before you talk to investors and a long-term investment strategy)

http://www.aboutmjones.com/mjblog/2016/7/5/and-now-for-something-completely-different (How cognitive, behavioral, structural and network diversity can benefit investors in hedge funds, private equity and venture capital)

http://www.aboutmjones.com/mjblog/2016/6/7/the-five-ps-of-gender-parity (Solutions for getting more women into the investment industry)

http://www.aboutmjones.com/mjblog/2016/1/25/no-quick-fix  (The many unconscious biases men AND women have to overcome to achieve gender parity in investing)

http://www.aboutmjones.com/mjblog/2016/1/4/nostradamnus  (Why the low return environment heading into 2016 may require some creativity on the part of investors re: active management, diversity, and emerging managers)

Emerging Managers and/or Capital Raising

http://www.aboutmjones.com/mjblog/2016/12/6/the-five-stages-of-emerging-manager-grief (Denial, anger, bargaining, depression and acceptance all figure into your capital raising experience)

http://www.aboutmjones.com/mjblog/2016/10/4/seed-me-seymour (The truth and consequences of seed capital)

http://www.aboutmjones.com/mjblog/2016/7/5/and-now-for-something-completely-different (How cognitive, behavioral, structural and network diversity can benefit investors in hedge funds, private equity and venture capital)

http://www.aboutmjones.com/mjblog/2016/6/21/capital-raising-crimes-punishment (Don’t be guilty of these capital raising crimes or pay the price of low AUM).

http://www.aboutmjones.com/mjblog/2016/4/5/are-you-hot-or-not (Evaluating a new fund launch – what makes some sizzle and others fizzle?)

http://www.aboutmjones.com/mjblog/2016/2/14/at-your-service (Choosing your service providers)

http://www.aboutmjones.com/mjblog/2016/1/31/making-the-first-move (How to make and keep contact with investors without making them hate you)

http://www.aboutmjones.com/mjblog/2016/1/4/nostradamnus (Why the low return environment heading into 2016 may require some creativity on the part of investors re: active management, diversity, and emerging managers)

Random Musings

http://www.aboutmjones.com/mjblog/2016/11/15/lenny-bruce-is-not-afraid (A post election blog that covers the importance of diversity, ESG, thinking before you talk to investors and a long-term investment strategy)

http://www.aboutmjones.com/mjblog/2016/1/18/money-manager-advice-dont-panic-but-do-bring-a-towel (What 2016 may bring - fee pressure, market volatility, few changes to the regulatory regime until after the election)

http://www.aboutmjones.com/mjblog/2016/5/3/kicking-the-buckets (Do strategy and style buckets help or hurt us? Getting past a checkbox mentality)

http://www.aboutmjones.com/mjblog/2016/4/18/you-are-so-money (Money manager horoscopes - don’t ask!)

http://www.aboutmjones.com/mjblog/2016/3/14/money-manager-report (How to effectively evaluate money manager performance without getting caught up in your benchmark underpants.

http://www.aboutmjones.com/mjblog/2016/10/18/sleepless-in-nashville (The things about the investment industry - hedge funds, private equity, venture capital, real estate, investment advisors, etc. - that keep me up at night)

http://www.aboutmjones.com/mjblog/2016/1/4/nostradamnus (Why the low return environment heading into 2016 may require some creativity on the part of investors re: active management, diversity, and emerging managers)

ESG/Socially Responsible Investing

http://www.aboutmjones.com/mjblog/2016/11/15/lenny-bruce-is-not-afraid (A post election blog that covers the importance of diversity, ESG, thinking before you talk to investors and a long-term investment strategy)

http://www.aboutmjones.com/mjblog/2016/2/7/ucee2gr6omdig0e5vtpsbx8qra738m (Predicting more interest in socially responsible/ESG investing, different pathways to fund management jobs, and a break from paper and PDFs)

Sleepless in Nashville

It’s that time of year again. The leaves are turning pretty colors. Kids are back in school. There is a real possibility of leaving my air-conditioned Nashville home without my glasses fogging upon hitting the practically solid wall of outdoor heat and humidity. And like any good Libra lass, I’m celebrating a birthday.

That’s right, it’s time for my annual orgy of champagne, mid-life crisis, chocolate frosting and introspection. Oh, and it’s time to check the batteries on the smoke detectors – best to make sure those suckers are good and dead before I light this many candles.

One of the things I’ve noticed in particular about this year’s “I’m old AF-palooza” is how much time I spend thinking about sleep. On any given day (and night), I’m likely to be contemplating the following questions:

1. Why can’t I fall asleep?
2. Why the hell am I awake at this hour?
3. How much longer can I sleep before my alarm goes off?
4. Why did I resist all those naps as a kid?

I even bought a nifty little device to track and rate my sleep (oh, the joy’s of being quantitatively oriented!). Every night, this glowy orb tracks how long I sleep, when I wake, how long I spend in deep sleep, air quality in my bedroom, humidity levels (in the South – HA!), noise and movement. 

To sleep, no chance to dream

Yes, I’ve learned a lot about my nocturnal habits from my sleep tracker – for example, I move around 17% less than the average user of the sleep tracking system, I’m guessing due to having two giant Siamese cats pinning me down - but the one thing I didn’t need it to tell me was that I SUCK at sleep.

I’m not sure when I went from “I can sleep 12 hours straight and easily snooze through lunch” to “If I fall asleep RIGHT NOW I can still sleep 3 hours before my flight….RIGHT NOW and I can still get 2.75 hours…1.5 hours….” but it definitely happened.

I don’t drink caffeine. I exercise. I bought a new age aromatherapy diffuser and something helpfully called “Serenity Now” to put into it. I got an air purifier, a new mattress and great sheets.

But no matter what I try, I am a terrible sleeper.

I’ve concluded that it must have something to do with stress. I do spend an inordinate amount of time thinking about life, the universe and everything, so perhaps that’s my problem.

So in honor of my 46th year on the planet, I decided to compile a list of the top 46-investment related things I worry about at night. They do say admitting the problem is the first step in solving it, after all.

In no particular order:

1. $2 trillion increase in index-tracking US based funds, which leads me to…
2. All beta-driven portfolios
3. Short-term investment memory loss (we DID just have a 10 year index loss and it only ended in 2009…)
4. “Smart” beta
5.  Mo’ Robo – the proliferation (and the dispersion of results) of robo-advisors
6. Standard deviation as a measure of risk
7. Mandatory compliance training - don’t I know not to take money from Iran and North Korea by now?
8. Spurious correlations and/or bad data
9. Whether my mom’s pension will remain solvent or whether I have a new roommate in my future
10. Politicizing investment decisions
11. Did I really just Tweet, Blog or say that at a conference?
12. Focusing on fees and not value
13. Robo-advisors + self-driving cars equals Skynet?
14. Going through compliance courses too quickly & having to do them over again
15. Short-term investment focus
16. Will I ever have to wait in line for the women’s bathroom at an investment event? Ever?
17. Average performance as a proxy for actual performance versus an understanding of opportunity and dispersion of returns
18. The slow starvation of emerging managers
19. Is my industry really as evil/greedy/stupid as it’s portrayed
20. Factor based investing – I’m reasonably smart – why don’t I get this?
21. Dwindling supply of short-sellers
22. Government regulatory requirements, institutional investment requirements and the barriers to new fund formation
23. “Chex Offenders” – financial advisors and investment managers who rip off old people (and, weirdly, athletes)
24. The vegetarian option at conference luncheons – WHAT IS THAT THING?
25. Seriously, does anyone actually read a 57-page RFP?
26. Boxes...check, style, due diligence...
27. Tell me again about how hedge fund fees are 2 & 20…
28. The markets on November 9th
29. The oak-y aftertaste of conference cocktail party bad chardonnay
30. Drawdowns – long ones mostly, but unexpected ones, too
31. Dry powder and oversubscribed funds
32. Getting everyone on the same page when it comes to ESG investing or, hell, even just the definition
33. Forward looking private equity returns (see also: Will my mom’s pension remain solvent)
34. Will my investment savvy and sarcasm one day be replaced by a robot (see also: Mo’ Robo)
35. After the election, will my future investment jobs be determined by my membership in a post-apocalyptic faction chosen by my blood type?
36. How many calories are in accountant-provided, conference giveaway tinned mints? (See also: conference chardonnay)
37. Why are financial advisors who focus on asset gathering more successful than ones that focus on investment management? #Assbackward
38. Dunning Krueger, the Endowment Effect and a whole host of ways we screw ourselves in investment decision making
39. Why divestment is almost always a bad idea
40. Active investment managers – bless their hearts – they probably aren’t sleeping any better than I am right now
41. Clone, enhanced index and replication funds – why can’t we just K.I.S.S.
42. The use of PowerPoint should be outlawed in investment presentations. Like seriously, against the actual law - a taser-able offense.
43. Will emerging markets ever emerge?
44. Investment industry diversity – why is it taking so looonnnnggg?
45. Real estate bubbles – e.g. - what happens to Nashville’s market when our hipness wears off? And is there a finite supply of skinny-jean wearing microbrew aficionados who want to open artisan mayonnaise stores that could slow demand? Note to self, ask someone in Brooklyn….
46. Did anyone even notice that hedge funds have posted gains for seven straight months?

Yep, looking at this list it’s little wonder that sleep eludes me. If anyone can help alleviate my “invest-istential” angst, I’m all ears. In the meantime, feel free to suggest essential oils, soothing teas and other avenues for getting some shuteye.

Sources and Bonus Reading: 

Asset flows to ETFs: https://www.ft.com/content/de606d3e-897b-11e6-8cb7-e7ada1d123b1

Recent HF Performance (buried) http://www.valuewalk.com/2016/10/hedge-fund-assets-flows/

HF Replication: http://abovethelaw.com/2016/10/low-cost-hedge-fund-replication-may-threaten-securities-lawyers/

Average HF Fees: http://www.opalesque.com/661691/Global_hedge_funds_slicing_fees_to_draw_investors169.html

Political Agendas & Investing: http://www.njspotlight.com/stories/16/10/03/murphy-adds-plank-to-platform-no-hedge-funds-in-pension-and-benefits-system/

Asset Gathering vs. Investment Mgmt: http://wealthmanagement.com/blog/client-focused-fas-more-profitable-investment-managers

World's Largest PE Fund: http://fortune.com/2016/10/15/private-equity-worlds-largest-softbank/  

Spurious Correlations: http://www.bloomberg.com/news/articles/2016-10-14/hedge-fund-woes-after-u-s-crackdown-don-t-surprise-sec-s-chair

Short-Term Thinking - 5 Months Does Not Track Record Make: http://www.cnbc.com/2016/10/14/venture-capitalist-chamath-palihapitiyas-hedge-fund-is-outperforming-market.html

You Can't Handle This (Hedge Fund) Truth

It's often quite amusing to me to chat with friends and associates outside of the investment industry about the investment industry. The vision that many folks have about the typical hedge funders' day-to-day existence is one part conspiracy theory, two parts lies and debauchery and a final part douchebaggery. So, to help clear up some of the most common misconceptions about working in alternative investments (specifically hedge funds), I thought it might be helpful to create a simple visual aid separating hedge fund fact from fiction. May this give you a giggle as you attempt to re-acclimate to work after the long weekend. 

Please note: I don't think that the hedge fund industry is in imminent danger of going away, but I do think that, like in Westeros, there will likely be some carnage before we make it through this round of poor average performance and fee, tax and regulatory pressure. Oh, and I don't own any of the images above. And finally, you may have to be 40+ or a bone fide cinematic geek to understand some of the references (Hint: Trading Places, Dr. No, Hitch), but I think you'll get enough of the picture. That is, hedge funds: More PowerPoint than "power suit, power tie, power steering." 

(Thank God) What You See Isn't All There Is

My ex and I parted ways about a year ago. After taking some time to eat some ice cream, clean out my closets and get my personal feng shui back in order, I decided recently it was time to re-enter the dating scene.

Unfortunately, as someone who A) works from home and B) travels extensively, I realized that meeting men who weren’t delivering FedEx packages or patting me down in the airport was going to be a bit challenging. So I bit the bullet and did the online dating thing.

Color me PTSD’ed. 

My first day at the online ‘all-you-can-date’ buffet saw me literally innundated with emails. “Hey!” I thought. “I must still have it!.”

But then I started to actually open those emails and realized that nearly all of the men who had emailed me could be categorized into one of three buckets:

1. Men holding things they had killed;
2. Men my dad’s age and older; and
3. Curiously, Civil War re-enactors (As an aside, do folks not realize the South actually lost the Civil War? I mean, isn’t that kind of like re-enacting the Titanic sinking over and over again? Big fanfare. Long denouement. Everyone dies. But I digress…)

Ho-lee-shit.

My mind started racing.

“Well, if this is the best that’s out there for me these days, I’m going to be single forever,” I thought.

“Do you suppose they have nunneries for spiritual, not religious, former Presbyterians-quarter Jews whose favorite form of cardio is shopping and who want to endow the cloister not only with their worldly ‘dowry’ but with vast amounts of high quality hair gel???” I wondered.

Seriously. My dating life was over. Kaput. I was hopeless. Driven to salted caramel ice cream, red velvet cake, NeimanMarcus.com and re-runs of the BBC's Pride and Predjudice in an instant.

And then I realized something.

I had fallen for literally one of the oldest tricks in the mind’s playbook. Instead of considering the known unknowns (i.e. – the thousands of men online and in the physical world from whom I hadn’t received disturbing, Santa Clause-esque pictures), I had taken the known knowns and concluded that I would eventually die alone and be eaten by my cats. And don’t even get me started on the unknown unkowns in this scenario. I mean, Bridget Jones-type endings don’t just happen in the movies, right?

Daniel Kahenman explained this information processing phenomenon in his book Thinking Fast And Slow as “what you see is all there is (WYSIATI),” and I was a classic victim.

But it was somewhat comforting to me to remember that I’m not the only one that falls for this little mind game. The investment industry does it all the darn time. In fact, it’s one of the things that makes me the kinda tired about the work I do.

Don’t believe me? Think about the following areas:

Hedge Fund Returns: A classic example of WYSIATI, we all know that hedge fund returns have been positively tragic for years, right? I mean, we see the HFRI Asset Weighted Index is down -0.21% through July and that obviously means that all funds have struggled to post any kind of decent returns. Well, hold on there a minute, Sparky. What if I told you that looking at that one number was giving you a bad case of the known knowns? What about all of the other funds in the HFR database? I guess they’re underperforming, too? Nope. Even if you look at other index categories you can see instances of strong outperformance: Credit Arb – up 5.17%, Distressed – up 6.20%, Equity Hedge Energy – up 10.73%, and those are all averages. Or what about the small funds I'm always pushing on y'all? They are up 4.1% for the year to date, according to industry watcher Preqin, compared with a somewhat anemic gain of 0.54% for the "billion dollar club." In fact, these numbers are the known unknowns – the numbers we could consider, but we don’t because there’s a nice, neat single little index number for us to rely on. And then you’ve got the unknown unknowns – the funds that DON’T report to HFR and aren’t accounted for in their index. I know of funds that are up 10%, 15% even 20%+ for the year. In a universe of 10,000 funds, drawing conclusions from one bit of known known data just doesn’t cut it.

Diversity: In April 2015, Marc Andreessen famously said in an interview that “he has tried to hire an unnamed woman general partner to Andreessen Horowitz five times. Each time, she’s turned him down.” See? Even a luminary in the venture capital world can get sucked into WYSIATI. Because the “unnamed woman” was likely one of the few females Andreessen associates with in the industry, she constitutes his entire universe. She is his known known. And if you think there aren’t great women and minority candidates, funds or investment opportunities out there, the problem is likely with you. Cultivating different networks, rewriting job descriptions to attract different applicants, working with recruiters who specialize in diversity, hell, even just being more intentional about hiring and investing can reveal a wealth of candidates that can help bring cognitive and behavioral alpha to your firm.

Fund Fees: Hedge fund fees are 2 and 20. 2 and 20. 2 and 20. I hear (and read) this so much I want to vomit. Do some funds charge 2 and 20? Sure. Do some funds (read: most funds) charge less, if not in headline fees, in actual fees? Hell yes! The average fees for a hedge fund these days is about 1.55% and 18% and declining. For new fund launches, fees were remarkably stable for years, never approaching the 2 and 20 milestone on average. And what’s more, roughly 68% of funds in a Seward & Kissel study offered reduced fees for longer lock ups, while 82% of equity funds and 29% of non-equity funds offered reduced-fee founders share classes. And what about hurdle rates? An investor recently swore to me that “no hedge funds have hurdle rates.” Well, that’s just bupkis. A show of other investor hands in the room immediately dispelled that myth, proving that, while not the majority of funds, some funds do have benchmarks to beat before they take their incentive allocation. What that one investor saw was not all there was.

Indices: Can’t Beat ‘Em, Join ‘Em: Obviously, the entire investment industry is trending towards passive investments. You can’t swing a dead pouty fish without hitting an article touting the death or underperformance of active investment management. And for people who have only been investing over the last 10 years or so, it probably looks like the S&P 500 is a sure bet. Always goes up, right? Well, wrong. While it’s certainly true that the S&P does tend to go up over time, you can never be sure what the time frame will be, and whether you’ll have time to recover from any unexpected downturn. But the bull market we’ve seen since March 9, 2009 isn’t all there is. Actually, if you recall, at that point in time, the S&P 500 had just experienced a 10-year losing streak. Ouch. Don't believe me? Ask any Gen X'er like me how much Reality Bites when the first 10 years of your 401k saving is wiped out by a tech wreck. Sorry, Millennials, but you haven't cornered the market on false financial starts quite yet. 

Investment Opportunities/Herding: Private equity and venture capital dry powder with nowhere to go. Hedge funds all own the same stocks. Crowded trades. High valuations. What investor could possibly make money in this environment? Once again, 13-Fs, Uber and Apple aren’t all there is. Even though we tend to fixate on the visible data, there are a number of niche-y, networked, regional, club-deal and other funds out there getting it done. Even big firms with the right resouces can pound the pavement, do the research or build the quantitative system that generates returns. Don’t believe me? Read the article (link below) on Apollo, who did more deals in the first part of this year than their three largest competitiors put to work in the same period. Just because the managers you’ve seen thus far haven’t done it, doesn’t mean it isn’t being done.

So before you freak out about one of the topics above and eat an entire red velvet cake while standing at your kitchen counter (no judgement).

Before you decide that you should do away wholesale with your hedge funds, private equity funds, venture capital allocation, financial planner, mutual funds or your dating life.

Take a step back.

Breathe.

Sign off of Match.com because, honestly, any site that thinks the best reason for going on a date with someone is that neither of you smokes needs help with their dating algorithm.

And understand that you’re likely looking only at what you know, which may not help you as much as you’d like.

Sources: HFR, http://www.huffingtonpost.com/2015/04/11/andreesen-women_n_7046740.html, Seward and Kissel, http://fortune.com/2016/08/04/hpe-private-equity-apollo-global-management/

Great Expectations

For the last several weeks, I've been watching what I eat. After months of travel and often substituting the contents of my minibar for dinner, I had grown concerned that my bloodstream was permanently clogged with Pringle fragments. So I bought some actual fruits and vegetables (goodbye, scurvy!) and sat down to eat something that didn’t start its life behind a Chipotle counter.

Now, me being me, of course I did my research first, only to discover that I seem to have cognitive dissonance when it comes to portion sizes. I expected that a portion of beef is the literal half-cow that I receive on a plate at Del Frisco’s, when instead it is 3 ounces, smaller than a deck of cards. What. The. Actual. Hell? I felt gypped. I felt bitter. I felt hungry, no make that HANGRY.

But a week later, after sticking to my original plan, I realized I felt full, energetic and, well, maybe even kind of skinny. Maybe the problem wasn't with the reality of eating, but with my perception of what it should be. Hmmmm.

And then I started thinking about investing, and how investors and fund managers seem to be facing similar issues.  No, I don’t mean that those pants make y’alls butts look fat. I mean that there seems to be some serious mismatches between what fund managers and investors expect from one another, almost guaranteeing that one (or both sides) will end up disappointed.

So in the spirit of the newly converted (quick, ask me how many calories a banana has!), here are a few ways that investment industry participants can better get along.

Investor Expectation #1: My fund managers should never lose money.

Reality: I’ve said it before and I’ll say it again – Continuous outperformance is a myth. No fund manager walks on water, is always right at the right time, or is even always right. No money manager can control for the unknown unknowns, and occasionally even the known unknowns can bite them in the tushie. The key is not to look for managers who never experience a drawdown (um, let’s remember money manager Bernie Madoff only posted one loss in his career) but for fund managers who can mitigate, manage and learn from losses, as well as be candid and proactive about addressing them.

Money Manager Expectation #1: My fund is AWESOME and yet no one gives me money. Jerks.

Reality: Your fund may be awesome, but if you aren’t getting assets, there has to be a reason. Maybe you don’t have the right network. Maybe you’re not targeting the right investors. Maybe your strategy isn’t in vogue right now. Maybe the investors you’re targeting are fully committed at the moment. Maybe you don’t mind a fair amount of volatility but other folks do. Maybe you have more faith in your simulated track record than others. Maybe you’re just too small/don’t have the right infrastructure at the moment and therefore folks can’t commit meaningful capital. The list of reasons why you’re not getting capital can be endless. Rather than dwelling on how shortsighted investors must be to overlook your fund, perhaps the best use of time would be figuring out why assets aren’t flowing in your direction and developing a plan to address those issues.

Investor Expectation #2: Money managers shouldn’t make money from the management fees.

Reality: While it’s generally accepted these days that a fund’s management fee shouldn’t be a bonanza annuity for any manager, it is also generally accepted (though sometimes forgotten) that running an investment fund takes moola. You have to be able to attract and pay talent a base salary in good times and bad. You need ample staff for your particular investment strategy. You may need research, IT, and other services. You’ve got to keep the lights on, the firewalls up and disaster recovery plans in place. How much this costs depends on strategy, location, number of investors, staffing requirements and a host of other factors. It’s up to the fund managers and investors (during due diligence) to determine a fund’s true “bottom line” and pay fees accordingly. Rarely will they be “zero.”

 Money Manager Expectation #2: Investors should have infinite time to talk to me about my fund.

Reality: There are generally eight to 10 hours in an investor’s working day. The investors that I speak to often get 20 to 100 emails and calls a day from fund managers. You start doing the math. Oh, and make sure you factor in committee meetings, travel, PowerPoint presentations, conference calls, HR, compliance tutorials, and bathroom breaks. Now do you understand why it took Issac Investor a few days (or a few emails) to get back to you? Or why they only want to chat for minutes, rather than hours, about your fund? To quote The Karate Kid, “Patience, Daniel-San.”

Investor Expectation #3: There’s only one way to be “institutional.”

Reality: As much as we want a “check the box” solution for fund evaluation, it will never exist. Just because a fund manager has a full time Chief Compliance Officer, Chief Operations Officer, Chief Financial Officer, and Chief Information Officer doesn’t necessarily make that fund better than one that has combined or even outsourced some of those functions. Different levels of staffing and infrastructure will be appropriate at different stages of fund evolution and for different strategies. The key is to determine if key functions are covered adequately, not to count C-Suite professionals in the org chart.

Money Manager Expectation #3: Anyone can be a fund marketer.

Reality: Some folks are great at initiating contact with investors, making a concise and compelling case for a fund, pushing gently for follow up and asking for (and getting) a commitment. Some people aren’t. If you aren’t one of those people (see also, Money Manager Expectation Number 1), even if it is your fund and you know it better than anyone else ever could, you should consider delegating those tasks.

What are your “favorite” expectation/reality gaps between investors and fund managers? Sound off in the comments below while I go eat some celery. 

Hedge Fund Truth - Don't Believe Everything You Read

It's time for another animated installment of The Hedge Fund Truth! Turn up your speakers, close your door and watch this week's video blog. This video looks at some of the truths and fictions around the hedge fund industry, focusing around recent bad press about returns, fees and a shortage of talent. It asks if the entire industry should be tarred with the same big brush or if there is nuance that investors and industry watchers may not have considered. Are hedge funds inherently BAD for investors, or do we need to gather more data and adjust our thinking? Enjoy!

The Hedge Fund Headline Predictorator

In the fantastic, utterly un-politically correct movie Blazing Saddles, Madeline Kahn plays a lisping, Teutonic, burlesque dancer (and at least part time lady of the evening) by the name of Lily von Shtupp. Enlisted to help rid Rockridge of its new sherrif, we get to see Lily in action as she performs one of the movie’s highly underated muscial numbers “I’m Tired.”  Kahn croons:

“I’m Tired…

Tired of playing the game…

Ain’t it a cwying shame….

I’m SO tired.”

I felt a bit the same this week as I contemplated the latest hedge fund headlines and had a head-on rendezvous with some déjà vus. A quick Googling let me know I wasn’t imagining things…we actually are stuck in a sort of hedge fund Groundhog’s Day. Minus the cheeky rodent.

Yes, it seems we get to start the year in January, where we lament that the average hedge fund performed averagely. Then in April and May we get the Hedge Fund 100 that showcases most successful (from an AUM perspective) funds, followed closely by the Hedge Fund “Rich List”, which tells us all how much we didn’t make the year before.

Around mid-summer we get treated to a rare showcase of female hedge fund talent, before switching gears to talk about mid-year performance, closures and anticipated end of the year launches. Short articles follow that focus on the Hedge Funds Care and 100 Women in Hedge Fund Galas, before we end the year discussing, again, how the average fund fared.

And in between bursts of schadenfreude, finger pointing and headshots of hedge fund bigwigs, we get a (time-lagged) look into hedge fund portfolios. Not that we care, because the average hedge fund is still average, but let’s just take a little peek.

So to thoroughly prepare us all for the year ahead, I thought I’d create a little cartoon calendar to keep the continuous coverage in perspective. 

(C) MJ Alts

And if you need something a bit more granular to mark the days just remember this happy mantra – negative hedge fund coverage? Must be a day that ends in “Y.”

Image Credits: BrainCheese and 123RF: <a href='http://www.123rf.com/profile_photoman'>photoman / 123RF Stock Photo</a>

Person or People?

I’m a crazy cat lady. Those that know me well in the industry are already clued into that fact. Those that don’t know me well probably at least suspected it. After all, no one can be this sarcastic and inappropriate without spending an inordinate amount of time by herself.

What folks may not know is I am, in fact, a total bleeding heart when it comes to any animal. I have stopped my car to rescue skunks, turtles, dogs, and cats. I have nursed injured geese and mice. In fact, just before Christmas I found homes and no-kill shelter placements for 48 cats that a even crazier cat lady was hoarding in her BFE, Tennessee trailer.

So imagine my outrage when the story broke about a baby dolphin that died after a bunch of total effing morons passed it around on the beach for selfies.

Come. On.

I was so pissed I stomped around the house blathering on (to myself and to my three cats) about how stupid the entire human race has become and how this is all a sign of the total end of civilization, which I am sure some idiot will capture on a freaking GoPro.

And then I started to calm down. I did what those of us who work with causes have to do so often when confronted by things too horrible to imagine. I breathed and I began to think about all of the people that I know who do good things for the world. How private equity veteran Jeremy Coller is a vegetarian and a champion for farm animal welfare. How 100 Women in Hedge Funds raised more than GBP550k for children’s art therapy. How one of my favorite seeders and one of my favorite family office guys both do volunteer work with wildlife and schools in Africa every year.

As a level of sanity returned, I remembered a quote from the existential masterpiece Men In Black: “A person is smart. People are dumb, panicky dangerous animals and you know it.”

http://memeguy.com/photo/42477/men-in-black-quote-seems-more-relevant-by-the-day

I needed to re-focus on persons. Not people.

All too often, however, we tar a person with our people brush. Sometimes it’s well deserved (not to mention a time saver), but most of the time we find that there are exceptions to every rule.  And while it’s hard for most of the public to imagine them as individuals, this is also the case in the world of alternative investments.

Let’s consider some of my fave hedge fund “you people” themes:

Hedge Funds Keep Getting Crushed – Sure, most index providers show hedge funds started the year down more than 2% on average, but that means some funds did worse and…gasp….some funds did significantly better. Hopefully you saw some of the latter in your own portfolio, but if not, Business Insider proves this point with this handy article.

Hedge Funds Charge 2 & 20 – In their study “All That Glitters” Elizabeth Parisian and Saqib Bhatti conclude that pensions pay roughly $81 million in hedge fund years per year, amounting to roughly 57 cents on every dollar of profit. In December 2015, Eurekahedge reported that average hedge fund performance fees last touched 20%  in 2007, while Citibank reported that management fees were, on average 1.59%, with an operating margin of 67 basis points. I’ve seen several funds launch of late with either no management fee or zero performance allocation. And what we’re talking about? They are just the headline fees. Most managers, roughly 97% the last time I polled them in 2013, were willing to drop fees for large investments. That’s a whole lot of persons charging less than “those people.”

Hedge Fund Billionaires – Google “hedge fund billionaire” and, if you’re like me, you’ll get 131,000 results in about 0.57 seconds. Of course, what’s interesting about that fact is it is probably roughly 130,500 hits higher than the actual number of hedge fund billionaires. If one assumes that all hedge fund managers with AUM over $1 billion are, in fact, billionaires (a stretch if I’ve ever heard one), then that leaves roughly 9,500 hedge fund managers who are not billionaires, unless they secretly won the family inheritance or actual lotteries. That’s a pretty unbalanced barbell on which to base any kind of income assumption. And of course, that doesn’t take into account that a hedge fund manager, even a Big Billionaire Hedge Fund Manager, can lose money for the year if they don’t achieve profitability for their clients.

At the end of the day, as my former boss, George Van, used to say, “hedge funds are as varied as animals in the jungle,” and boy, is he right. And whether we want to believe it or not, hedge fund managers are individuals first, and “those people” second.

The moral of the story? Generalizations are generally not your friend. They make you mad. They make you sad. They may make you ignore investment options based on public opinion rather than facts. Instead, take a moment to slow down and individualize. Unless I find out you took a selfie with that dophin, in which case, I suggest you speed up and use your head start. 

Money Manager Advice: Don’t Panic, But Do Bring a Towel

Last week’s blog got me in a bit of hot water with some alternative investment folks I know. In fact, some thought it should have come with a lifetime supply of chocolate-covered Prozac to counteract the depressive, after-reading effects.

To answer the queries I seemed to receive en masse: No, I am not a defeatist. I am instead an optimistic pessimist – I’m often quite positive that the worst possible thing is bound to happen.

But just because I suggested last week that a few fund managers might have to (or want to) evaluate their long-term business viability in 2016 doesn’t mean I think this year is a total loss.

In fact, I’d say my best advice is, in the infamous words of Douglas Adams, “Don’t panic!” If you can do that and still somehow end 2016 knowing where your towel is, you’ve won.

But seriously, there are a number of positive developments for money managers that could play out this year. For example:

Market Volatility May Be Your Friend – If the stock market theme song post-financial crisis has been “Sweet Child of Mine”, 2016 has certainly changed its tune. Market volatility during the first two weeks of January brought me back to my high school-era living room, sitting in front of my (not flat-paneled) TV watching Axl Rose wiggle across stage belting out “In the jungle. Welcome to the jungle. Watch it bring you to your knnn, knnn, knnn, knnn, knees, knees. I want to watch you bleed!” That was one of my favorite videos back when, you know, MTV actually played music.

And while market volatility can be an exercise in white-knuckle, bile-producing, ‘how-will-I-ever-retire-now’ angst, it also offers investment managers an opportunity they haven’t really had since March 9, 2009: The chance to be a hero.

In a raging bull market, most performance looks like beta. No matter how well an active money manager does, the market can do it faster, cheaper and potentially better. A bull market is often a chump factory, no matter your talents.

And don’t get me wrong, I love a bull market because I am generally in better shape (shopping is, after all, my cardio), but a bull market doesn’t love active management. A down, sideways or otherwise volatile market creates what active money management really needs: Opportunity.

So play this one well, intrepid asset managers, and you could potentially see your breakthrough moment. And may the odds be ever in your favor.

The Fees Knees – Speaking of your knnn, knnn, knnn, knnn, knees, while the markets haven’t exactly been a jungle until recently, the fee debate certainly has.  There has been a barrage of class action lawsuits against Fidelity, Vanguard and others about excessive 401(K) fees. And if you Google “hedge fund fees” two of the top three responses are “Hedge Fund Performance Fees Decline Sharply” (FT) and “The Incredibly Shrinking Hedge-Fund Fee” (Bloomberg View).

Due at least in part to the inability of active managers to shine (see above), fees have become a inevitable battle ground for investors. When the rising tide lifts all ships, it becomes easier to confuse price with value.

But market volatility may help successful managers overcome near militant fee resistance, and interestingly enough, a new lawsuit against Anthem Inc. about low fee funds may help traditional active managers as well. 

 “An overriding theme of lawsuits attacking 401(k) plan fees is that they generally view the cheapest investment as being the most prudent investment choice fiduciaries can make for plan participants, according to Brad Campbell, counsel at Drinker Biddle & Reath and former head of the Employee Benefits Security Administration. That, Mr. Campbell said, is inconsistent with a fiduciary's obligations under the Employee Retirement Income Security Act of 1974, which indicates fees must be reasonable rather than the most inexpensive. According to the text of the new suit's complaint, “investment costs are of paramount importance to prudent investment selection,” which Mr. Campbell said is “an inaccurate statement of the law.” (http://www.investmentnews.com/article/20160112/FREE/160119984/401-k-suit-targeting-vanguard-fees-could-support-case-for-active)

After all, to misquote Brian Tracy, “The true measure of the value of any [money manager] is performance.”

Election Attention – And finally, in case y’all have slept through the proposed UK Trump ban, the Sanders-Clinton (oh, yeah, and O’Malley) poll mania, and impassioned pleas for walls around the country or just around Wall Street, you know we’re in an election year. Why is this a good thing? Well, for one, it’s wildly entertaining, although it does bring to mind PoliSci 401 “Those who seek power are not worthy of that power.” (Plato)

But really, it means the Eye of Sauron (read: regulatory and compliance entities) may be thinking about Wall Street, but it is unlikely that much will change this year, giving everyone a chance to continue working through compliance, operations, Form PF, AIFMD, and all of the other special gifts fund managers have gotten post 2008. Hell, someone may even come up with a way to streamline some of those processes during the short lull in activity and actually create some true economies of scale for struggling small funds. It’s MLK day (er, night) as I’m writing this so well, dammit, I have a dream.

In short, it ain’t all doom and gloom out there for the financial industry, but if this blog failed to convince you of that, I can only offer the following to answer any of your lingering doubts or questions.

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