Why Your Ass(ets) Is Still Single (Digits)

A few weeks ago, I put out the call on Twitter that I wanted to write an investment manager agony column. Of course, in the deluge of Mad King tweets that seem govern both foreign and domestic affairs of late, that call went largely unnoticed. I was beginning to agonize over the general lack of agony when I heard a primal scream from the darkness - otherwise known as a Twitter DM.

“WHY CAN’T I RAISE ANY ASSETS????”

This, of course, is one of the most pervasive forms of investment manager agony, so I decided to tackle the question, using my own misery as my guide. You see, as a single woman in my 40s, I know all too well the frustration that comes from looking tirelessly for something that proves to be incredibly elusive. In my case, I’ve turned to the modern-day Wizard of Oz, otherwise known as the Internet, to try to solve my dating dilemma. I mean, we’ve all heard stories of our friend’s cousin’s sister Becky who is happily married with two kids to a guy she met on Tinder, right?

After a few months of my recent Internet experience, I remain convinced that there are good matches out there, although perhaps not in Nashville, which seems to be the dead fish picture capital of the world. I mean, one of my governing theories about dating and fund raising is that there is, in fact, a lid for every pot, so I refuse to admit defeat.

BUT I remain even more convinced that there are some super obvious giveaways that maybe this one ain’t “the one.”

So, Dear Random Twitter Fund Manager, I propose to you that perhaps you’re quite the investment catch, and you just haven’t met the right investor who can make all your dreams come true.

Or you may be like one of these folks that pop up in my dating feed from time to time, in which case buckle up, Buttercup - you’re probably in for a bumpy ride.

Look, if you’re newly separated from your prior firm and you don’t have a great, audited and portable track record to vouch for you, many investors are going to have trouble getting involved. I mean, you could prove pretty unstable, you know?

I don’t want to insult the vertically challenged, but I have a hard and fast rule that I won’t date anyone shorter than me. I mean, I’m 5’3” for Pete’s sake. It shouldn’t be that hard for an adult male to be taller than that. I just have this horrible mental image of my (potential) boyfriend’s jeans being smaller than mine that I can’t get over. And it is not hot.

Like me, many investors have trouble getting past a fund that is just too small. It may be that they have an investment policy statement that says they can’t be more than 10% or 15% of your assets, which makes the allocation (and the time for due diligence) just not worth it. It may be that they worry about the business risk or how you’ll support the firm when performance isn’t great. Whatever it is, move on. There ARE folks that will find your size appealing, from seeders to Managers of Managers. Swipe right on them instead.

It has taken me a while, but I’ve finally learned that people who put NO DRAMA in all caps ALWAYS bring the drama. Always. And if you’re bringing the drama to investors in the form of volatility, crazy headlines, drawdowns or worse, they’re going to figure that out, too, and run in the opposite direction.

I hesitated to use a picture from my own “dating” experience, but given the anonymity factor in this photo, I figured I was safe. Seriously, y’all, this guy popped up for both me and a friend recently, leaving both of us to wonder “Is this a joke?!”

Maybe your fund marketing efforts don’t involve a Santa hat, but all the same, maybe you’re still not taking your marketing seriously. Do you have a high quality marketer on board? If you are doing your own marketing, have you reviewed your successes and failures to figure out what to do differently? Do you have a compelling pitch book? Do you go to enough conferences without going to ALL the conferences? If you don’t take marketing seriously, and by that I mean treat it as if it were a legitimate part of your business, how do you expect money to flow in?

I actually had to look this up the first time I saw it. Evidently, there’s a whole crop of folks out there who think that if their significant other knows they’re being cheated on, it’s all good. Sorry, folks, but that’s just creepy. And weird. And off-putting. And perhaps your firm is perfectly happy calling an investor your one and only, but there may be something else slightly creepy and weird about your firm that is off-putting in its own way. Is your spouse or child a major player in the firm? That’s not a deal breaker for some folks, but it does raise the issue of controls. Do you have a third, fourth or fifth-tier auditor? Maybe you’re saving money, or maybe you’re hiding something (hello Bernie Madoff!). Have you had a lot of staff turnover in the life of the fund? Could be growing pains, or it could be you are hell to work with. Look at EVERYTHING in your fund the way an outsider would and ask yourself “Is this an easy tick box or does it raise some significant questions?” At the very least, be prepared to do some explaining in a meeting/due diligence process. At best, consider what you can do to mitigate the creepy factor soonest.

On the one hand, I have to admire this guy’s confidence. On the other much larger hand: euuuuwwwwww.

Likewise, confidence in investing is a good thing. But thinking you’re all that and perhaps talking in overly technical terms, charging fees that aren’t justified by your track record or strategy or acting like you’ll never have a loss is incredibly off-putting. And to be honest, this is often the subject of investor post cocktail banter at conferences.

So, Dear Random Twitter Fund Manager, I hope this helps to explain your marketing conundrum. And may the coming months bring you the satisfying relationship that I deserve.

In the meantime, if you have an investment manager (or investor) agony question I can “help” with, please don’t hesitate to reach out.

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!

In Praise of Very Good Dogs

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.

Marketing, Millionaires and Girls That Go “Woo!”

A few weeks ago, an industry friend came to Nashville for a meeting of the Mid-South Alternative Investment Association (MSAIA). When he told his (New York-based) work colleagues that he was attending the meeting to network with investors, he was met with laughter, derision and accusations that he was only gracing my fair city to meet chicks. After all, Nashville is the bachelorette capital of the country.We’re now known for having a surplus of both hot chicken and girls that go “Woooooooo!”

Despite the skepticism of his colleagues, my friend did attend the MSAIA meeting, where there were 51 attendees (larger than some conferences I’ve attended) including family offices, endowments and pension representatives. In fact, even though it’s not New York, the society as a whole boasts 700 members (including more than 200 allocators) from a number of cities around the Mid-South. Sure, we’re more likely to have our meetings at Maggiano’s than at Cipriani’s, but despite the mass market meatballs, there IS investor flesh to press and nobbing to hob. 

Yet it seems that many (most?) people in the investment industry seem to believe there is no financial world outside of New York/Connecticut, Boston, Dallas, Chicago, Miami, Los Angeles, San Francisco and Washington, DC. And while it’s true you’re likely to find a larger absolute number of millionaires and more institutional investors in those locales, it doesn’t mean that other areas of the country are complete bereft. 

In fact, if you really want to get down to the investor lick log, there are certainly states that have higher concentrations of wealth outside of the traditional marketing stomping grounds. Hawaii, for example, boasts 43.1 millionaires per 1,000 residents. Delaware has 34.7, more than New York or Florida, thank you very much, and Rhode Island, Utah and Ohio all outpace Texas in millionaires per capita, believe it or not.

 It’s funny, but in investing it almost always pays to go off the beaten path. Whether you’re looking to grab a new private equity or venture capital portfolio company, where less competition means a lower multiple, or if you’re just bargain hunting in public equities or fixed income, finding unique opportunities (or at least finding them first) is generally perceived as a good thing. 

However, when it comes to fund raising, despite how hard it is for so many fund managers (read: all but the largest of the large), taking a road less traveled isn’t looked upon as a sound investment. In point of fact, however, while there may be fewer meetings to be had away from major financial centers, but it can be easier to get meetings as neglected investors are often happy to see folks in their own offices, rather than traveling (yet again) to meet them in theirs. 

To be clear, I’m certainly not advocating you spend all your time flying to flyover states, but if you can find a few good events (local investor meetings like MSAIA, Southeastern Hedge Fund Association, Texas Hedge Fund Association, larger CFA events and the like) and add on a meeting or two, it might just be worth the time, effort and almost inevitable chain restaurant food. Even a single investment from a jaunt like that more than pays for the trip, and that should be enough to make even the most jaded investment professional yell “Wooooooo!” 

Jackie Robinson, Ginger Rogers And Me

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:

1. 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. 

2. 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.

3. 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.

4. 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.

LP on a Shelf

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.

Asset Raising While Diverse

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.

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

You Can't Always Get What You Want

Last night, I flew home from San Fran on the redeye after attending not one, but two, conferences in San Fran. Normally, I’m a champion sleeper on planes (as any of you who have ever seen me pre-pushback, comatose, mouth agape, and a tiny glistening pearl of drool perched majestically upon my lips) are well aware, at least based on the post flight mocking I get.

But on this particular flight, I was awake. I couldn’t get comfortable in my (there is a Jesus!) upgraded seat. I moved to the back of the plane and claimed a whole row to myself, but was likewise unable to sleep there after my left hip lost all feeling due to the firmness (I met floors in college with more give) of the seats.

After limping my way Sanford and Son style back to my original seat, I finally accepted my insomniac fate and settled with my ancient iPhone to listen to some tunes. Ironically, the Rolling Stones “You Can’t Always Get What You Want” was one of the first songs to play. I did not, however, appreciate said irony at the time.

Once I was able to grab a little disco nap this morning, it put things into a slightly better perspective. Sure, I couldn’t get what I wanted (a nice, long, mouth-breathing sleep in a tube of recirculated air), but maybe I needed those moments of introspection. I mean, otherwise, I wouldn’t have today’s blog post, right?

Likewise, I meet a ton of managers that are frustrated that they can’t always get what they want, usually $1 BIIILLLION Dollars from institutional investors in six months or less, but maybe, if they noodle on it in the dark of night under a (probably) ebola-encrusted airplane blanket, they may figure out how to get what they need.

To help investment managers on this journey, I put together a handy dandy decision tree to help determine whether now is the right time to market to endowments, foundations and pensions, or whether they should take other steps to get the AUM they require.

Should You Be Marketing To Institutional Investors?

(c) 2018 MJ Alternative Investment Research

But investment managers, take heart, preferably before you start creating a voodoo doll with my face on it. There are plenty of things you can do to still get your Mick Jagger on and try spending some time to get what you need.

• Try a different demographic - some of the items above are more specific to institutional investor clients and may not apply to high net worth individuals, family offices and even friends and family.

• Talk to institutional investors when you DON’T have a fund to raise - I know you’re probably saying, in the words of Dorothy Parker, “What fresh hell is this?”, but investors can often be more accommodating of meeting requests (and provide some darn fine feedback) when you’re NOT looking for an immediate wire transfer. Asking for a half hour of time with an up-front caveat that you’re not “selling” anything can be a beautiful way to start a client relationship.

• Get your ducks in a row - Figure out the nature of your game now so that when you do talk to institutions, you’re bulletproof. That takes time and effort as you perfect your elevator pitch, refine your deck, get the right service providers on board, train up IR staff, etc. Get it right on the front end and it will pay off on the back end.

I know it can be hard to wait to jump into the AUM chase, but if you follow at least some of this advice, I swear you’re likely to get a little more Satisfaction.

Principals, Agents and the Magic of Ari Gold

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: 

• They’re often quicker to invest – usually because there’s not layers upon layers of decision makers behind the scenes. There is no (or a limited) investment committee and there’s usually no consultant or operational due diligence outsourced resource. 
• “Principal” investors may choose more innovative or niche-y investment strategies, invest in new trends earlier and generally take more risks. 
• However, they are often able to do this because they are investing their own capital and may not have fiduciary duty to anyone other than themselves or a small group of constituents, which means they don’t have to make enormous allocations or worry about headline risk. 
• Think high net worth individuals, single family offices, small foundations. 

Investors who are agents also have traits in common:

• They usually take longer to invest due to multiple layers of sign-off and decision making. 
• You can be pretty sure that every nook and cranny of your fund, firm and investment strategy will be gone over with a fine-toothed comb, because these investors have more headline and client risk. If an agent investor recommends a fund that blows up or fails you’re almost certain to hear about it because they are investing large, either for themselves or on behalf of their external clients.  
• Because “agent” investors often move as a herd, you can rest assured that where one goes, there will likely be a sequel. Making it past the gate with one agent can pave the way for others.
• Think institutional investors (whose minutes and meetings are often matters of public record) and investment consultants. FOFs (who generally have to think about attracting clients to ensure their existence) can fall anywhere on the agent-principal spectrum, depending on the organization.

(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. 

I’m Out of Touch, And You’re Out of Your Head When I’m Not Around

It’s August. It’s slow. It’s what the Hitchhiker’s Guide to the Galaxy might have referred to as the “long dark teatime of the soul” when it comes to investment industry activity. The conference circuit is dead. Everyone is on vacation. There are practically tumbleweeds rolling through your office.

(c) 2018 MJ Alternative Investment Research - I spent my OOO time this year in Middle Earth.

Yep, it’s about this time of year when you believe that everyone but you sold in May and went away.

And you’ve got the Out of Office emails to prove it.

Sure, you’re still sitting in your office, or you’re on a nice beach trying to be productive while your family cavorts and relaxes, dutifully sending out email requests for meetings, performance updates, introductory information, requests for proposals, whatever. And all you’re getting back from Darryl, John, Hall and Oates is “I am currently traveling with no/limited/sporadic access to emails/phone. If you need immediate assistance, please eff off/contact this random person. I will respond to/continue ignoring your email upon my return.”

So what’s an investment professional to do?

If you’re getting the Out of Office (OOO) treatment these days, try these handy tips for coping:

1)    Assume the email you just sent is going into the virtual circular file. It ain’t never gonna be read, answered or otherwise acted upon. Even if the autoreply doesn’t go as far as this particular OOO did to spell things out for you, your chances of getting a timely response are pretty slim. So look at the date the out of office email expires and mark your calendar for one week after that date. On that day, send your email again. Do not forward, do not refer to your prior email. Send a virgin email, to be touched for the very first time, without the guilt and recrimination of a forward. Start fresh. Just like you hope the recipient is doing after a nice, relaxing holiday.

2)    In investing, time is money, but it isn’t life. We’re not carrying hearts around in beer coolers, y’all. Whatever you are emailing about, chances are it can probably wait a week (or two) for a response. Even if it doesn’t feel like it to you in a particular moment. If you get an out of office response, DO NOT attempt to hunt the person down like you’re the Terminator of the email world. On a recent vacation, I had more than one recipient of my OOO decide to text me since they couldn’t reach me via email. Needless to say, given the 17-hour time difference, I was none too happy to receive communication from those individuals in the wee hours of my morning respite from work and responsibility. So, before you go to extreme lengths to contact someone who is out of the office, ask yourself how you would feel if you reached them and they were, I don’t know, at a funeral. Would your call or text be worth disturbing that particular occasion? If the answer is “no” then put down your phone and back slowly away. Otherwise the only funeral you may be going to is yours.

3)    Try a little patience. Most people I know start going through their missed emails from the top down (most recent dates first), in the off chance something has resolved itself in the intervening days or moments and they can blissfully ignore all related messages. If you emailed early on in someone’s OOO timeline, give the person a few days to get back to you. See also, OOO tip one.

4)    For those composing an OOO, go ahead and say you’re not checking emails. Even if you are, there’s bound to be a few you can’t or won’t deal with. Telling people you’re checking emails sporadically or that there’s a “delayed response” gives those receiving your OOO false expectations, and gives them a little more leeway to harass you while you’re grabbing some R&R (or attending a conference, or staycationing…).

5)     Even if you don’t get an OOO response, if you don’t get response from someone after a week during this most humid time of the year, give folks the benefit of the doubt. There’s nothing worse than coming back to the office to find a bunch of pissy emails (“I tried you last week but didn’t hear back”) to make someone NOT want to prioritize you.

If you find you’re just too impatient to follow my Out of Office Etiquette, perhaps you need a little OOO time yourself. Economist Juliet Shor found that Americans take less vacation than the average medieval peasant, who worked around 150 days a year. So make a break from your feudal ways and chillax. You can always start stalking folks again after Labor Day.

Thank You Sir May I Have Another?!?

Thank You Sir May I Have Another?!?

The first time I ever saw Kevin Bacon in a movie was the infamous and hilarious flick “Animal House.” Although he didn’t yet have the appeal of, oh say, Ren McCormick (me-ow!), he did make an impression on me in his fraternity brother days. Perhaps it was his tight-assed, ROTC-inspired declaration of “All Is Well!” during the movie’s climax that got my attention. But, more likely, it was his tighty-whities in the infamous fraternity initiation paddling scene that caught my eye. I couldn’t imagine, even at the ripe old age of 8, that a grown man would allow another man to paddle him. IN HIS UNDERWEAR. And would cheerfully, though admittedly through gritted teeth, ask for another. And another. And another.

But then again, there are a lot of things I don’t understand, even today at the ripe old age of, well, not 8 years old. For example, I don’t understand why another study showing that smaller and younger funds outperform is necessary or the results touted as surprising.

Haven’t large funds been spanked with this data enough by now for us all to cheerfully conclude that smaller, younger funds outperform their older, larger peers? 

I guess not, because just two weeks ago yet another entry in the small/young fund cannon made its appearance. On April 26th, Chao Gao and Chengdong Yin (Purdue University) and Tim Haight (Loyola Marymount University), used data from the Lipper TASS and the HFR databases to prove YET AGAIN that good returns come in small and new packages. 

Now, as someone who actively supports emerging and diverse (who are often also emerging) managers, I should be happy to see yet another entrant into the verifiable tsunami of studies proving that small and young funds outperform. But really, isn’t it a little bit embarrassing at this point? I mean, it’s not like we don’t have a metric crapton of research that shows small and young funds outperform already, right? But just in case there was ANY doubt left in anyone’s mind at this point, allow me to point you to the studies that may help you reach the well-documented conclusion that, when it comes to emerging managers, all is, in fact, well.

Small & Young Funds Are Killing It – A Non-Exhaustive, But Pretty Damn Complete List of Research

PerTrac studies on emerging managers, 2007-2011

eVestment studies on emerging managers 2012-2014

Mayer & Hoffman paper on emerging managers. May 2006. Also appears in the book “An Investor’s Guide to Hedge Funds” 

“An Examination of Fund Age and Size and Its Impact on Hedge Fund Performance” Derivatives, Use, Trading and Regulation, February 2007

 “An Examination of Fund Age and Size and Its Impact on Hedge Fund Performance,”Journal of Investing, vol. 18, no. 1, spring 2009.

“Emerging Managers: Good Buy or Good Bye?” Barclays Capital, 2011.

“Smaller Hedge Fund Managers Outperform: A Study of Nearly 3,000 Equity Long/Short Hedge Funds” AllAboutAlpha.com, February 18, 2013

“Are Investors Better Off with Small Hedge Funds in Times of Crisis?” City University London, July 14, 2015. 

“Emerging Hedge Funds Outperform Established Peers” Preqin, July 2017 (multiple other years of studies also available)

“Size, Age and The Performance Life Cycle of Hedge Funds” Gao, Yin, Haight, April 26, 2018. 

Want some long-only fund action? I got that, too. How about:

“Does Fund Size Erode Mutual Fund Performance? The Role of Liquidity and Organization” Chen, Hong, Huang, Kubik, December 2004

“Liquidity, Investment Style and the Relation Between Fund Size and Fund Performance” Yan, 2008.

“New Evidence on Mutual Fund Performance: A Comparison of Alternative Bootstrap Methods” Blake, Caufield, Ioannidis, Tonks, October 2015.

“On Size Effects in Separate Accounts” Evans, Rohleder, Tenesch, Wilkens, August 2017.

And how about some Private Equity findings? 

“Making the Case for First Time Funds” Preqin, November 2016

“Feels Like the First Time” PitchBook, 4Q2017

As I mentioned, this is a decent representative list of studies of small and new funds across the asset management spectrum. It is not exhaustive, mostly because I’m not sure it needs to be. I mean, you can’t really be standing there decked out in your undies asking me to hit you with even more data, right? So, let’s put the kibosh on proving something we should already know and just work to bring home the Bacon by investing in funds of all shapes, sizes, ages and types, not just tried and true established managers. 

Stupid Human Tricks

You know what I miss? David Letterman’s old Top Ten Lists. Hands down, those were my favorite part of late night TV. I know that others have stepped in to try to fill the void. Bill Maher has his “New Rules” and Jimmy Kimmel has the often-entertaining “Mean Tweets” but, to me, David Letterman will always be the original king of the recurring hilarious late night bit.

I mean, who can forget the Top Ten Things That Sound Cool When Said By Snoop Dogg? And the Top Ten Reasons Homer Simpson Should Be President. Or my all-time personal fave: Top Ten California Names.

So in honor of Letterman and out of a wealth of nostalgia that popped up unexpectedly over the weekend, I hereby offer you my own top 10 list…

Top Ten Ways To Alienate A Potential Investor

10. Spend the first 35 minutes of a call or meeting talking about your bio.

9. “I assume you’ve reviewed our pitch book in advance of this call…”

8. Inability to make polite small talk in lieu of laser-like need to focus on your investment product.

7. Interrupting conversations at conferences and/or staring from two feet away until said investor is so uncomfortable they interrupt their own conversation to acknowledge you.

6. Literally not knowing anything about the investor before you approach them.

5. Two words: Wardrobe malfunction (true stories, but better told over adult beverages than in a blog).

4. Ignoring time zones/weekends/holidays when calling.

3. Mansplaining why an investor’s reasoned conclusion is wrong.

2. Lying, and yes, this includes “gilding the lily.”

1. Saying “I’m not going to go through each slide.” And then going through each slide.

You Might Be An Emerging Manager If....

As someone who was born, raised, and has spent the majority of my life in the South, one of the things I’m required to love, besides SEC football, is Redneck Humor. From Trae Crowder, Corey Ryan Forrester, Roy Wood Jr., and Drew Morgan today to Ron White and Jeff Foxworthy a decade or so ago, I love poking fun at myself and laughing at my fellow rednecks. I can reliably drive on the backroads of Tennessee and come up with “You may be a redneck” moments every few miles, and my friends and me are up for our own hillbilly kudos when summer reliably finds us in a backyard with a baby pool and some PBR.

I even have a personal favorite “you may be a redneck joke” that makes me laugh every time I tell it:

“You may be a redneck if you think a tornado and a divorce have a lot in common – ‘cos either way, someone’s losing their trailer.”

(2) 123rf.com

Bwhahahahah!

A recent trip to the WellRED comedy show in Nashville got me thinking about all the ways in which, I as a redneck, can be defined. It also got me thinking about how we categorize and group other people, places and things in an attempt to make cosmos out of chaos.

There are few places in the investment world where there is more confusion than in the world of emerging managers. Ask two people what constitutes an emerging manager and you’re likely to get two completely different answers. Is it small funds? How small? Is it diverse funds? Ownership or fund management? Is it new funds? What’s the cut off? Does the manager need to be local? Does the manager need to be certified? What counts as a minority? Frankly, I find that emerging managers swirl in their own vortex of uncertainty.

So to help everyone out a little bit, I thought I’d use my 11+ years in the emerging and diverse manager space to create a handy-dandy checklist to determine whether or not a fund may be emerging. After all, it seemed like a great project for a winter weekend when 0.5 inches of snow has me pinned inside the house like the Southerner I am.

You Might Be An Emerging Manager If…

…you have less than $2 billion in AUM and manage long-only assets. Although this may seem reasonable on the surface, since the largest long-only fund managers may control trillions of dollars (with a “T”), it may still be a little large. In an August 2017 study by Richard B. Evans, Martin Rohleder, Hendrik Tentesch, and Marco Wilkens looked at 3,370 separate accounts (“SMAs”) managing $3,671 million and found those in the 10th percentile managed $5.38m, the 50th percentile managed $128m and the 90th percentile managed $1,470m, with a range of accounts from 3 to 15 to 305, respectively. In line with research about mutual funds, the authors found better performance in the smaller SMAs, in part due to liquidity constraints and market impact costs, but also due to increasing management complexity as the number of accounts increased. Take a look at the research if you’ve not seen it yet.

…you have less than $1 billion, and really more like <$250 million, in hedged AUM. (There are only about 700 funds with over $1 billion, so if you’ve gotten to that milestone, beating out 9,300 of your peers, I’d say you’d emerged).

…your firm is owned at least 51% by women or minorities for official certification, or has 33% women or minority ownership if you want to get a bigger crop of funds from groups that historically have had less assets with which to launch funds, and therefore may have partnered with firms or individuals that dilute the ownership structure.

…your fund is managed by women or minorities. This can be key for investors who are looking for cognitive and behavioral alpha (or differentiated networks for private asset funds), and may be more important to some than ownership status.

…the minority ownership or fund management in question is done by a U.S. citizen.

…the minority ownership is not by fungible personnel who were given ownership status simply to qualify for MBWE status (wives, daughters, back office personnel, figureheads).

…the fund is less than three years old or is a Fund I, II or III.

…the fund is not part of a mega asset management complex.

…the fund meets the above requirements and is located in the same state as the certain potential investors (Illinois, Pennsylvania, etc.)

…the fund is owned by veterans or disabled veterans.

Now, obviously there are all kinds of competing definitions out there, and there are also practical implications for investors, particularly larger ones. For example, if an institution manages billions of dollars (with a “B”), it may be difficult for them to look at the smaller end of the spectrum of emerging funds without having to assemble a massive portfolio of managers. Still, I hope these definitions may resonate with folks out there who are looking to capture some structural, cognitive and behavioral alpha. They may be a more successful investor if….

Sources: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2933546 Preqin, SBA