You're Wrong! Now How 'Bout That Investment...?

Last August, I took my blog readers on a brief tour of my even briefer online dating struggles in an effort to prove that the behavioral bias WYSIATI (“what you see is all there is”) strikes indiscriminately, whether you’re a hedge fund investor or a hapless single gal. In case you missed that treasure trove of self-deprecation and BiFi, you can revisit it at http://www.aboutmjones.com/mjblog/2016/8/16/thank-god-what-you-see-isnt-all-there-is.

Since then, with the help of meditation, more than a few margaritas and some PTSD therapy, I have managed to put my online dating adventures behind me.

At least until this week, when I suddenly had an Apocalypse Now style flashback courtesy of an overly persistent investment marketer.

You see, during the roughly six weeks that I looked for love in the wrong online places, I attracted only three types of men: those who liked to hunt and kill things for sport (with pictures), those that liked to dress up and reenact the Civil War (also with pictures) and those that were old enough to be my dad. I won’t lie, sometimes I was lucky enough to find all three in one stunning candidate, but mostly they came in one flavor or another.

Surprisingly, the hunters weren’t the most persistent. Nor were the Civil War reenactors, who were, after all, really used to losing by now. Nope, it was the Very Old Dudes (VOD) that were the absolute worst when it came to tenacity.

The encounters were remarkably similar. I’d get a message that announced, usually without preamble, that

“I know you think I’m too old for you but you’re wrong. Love VOD”

After verifying that said gentleman had been eligible for AARP for roughly half of my not-insignificant lifespan, I would click ignore and move on. Inevitably, I would get a second email.

“I’m still not too old for you. XOXO VOD”

Why yes, sir, in fact you are. Delete.

And finally –

“You should know that everyone thinks I’m very young for my age. #VOD”

After I deleted my Match.com account, I rested comfortably in the knowledge that I could avoid more of these types of sales pitches in the future. Until last week. When an investment sales rep used the exact same shtick.

“Hi! I got your name from [the Match.com of investors, evidently]. You don’t know me, but I thought you might be interested in this investing opportunity that is completely out of left field.”

I was traveling so I ignored the email for a few days, only to get a voice mail.

“Oh hi! I sent you an email about this very random investment opportunity a few days ago. Call me back so we can chat about it.”

Because I generally try to respond to all investment inquiries, save those from Nigerian princes, I reviewed the material (briefly) and emailed the gentleman back to politely let him know it wasn’t for me. His response?

“May I ask why you’re not interested? It’s a great opportunity.”

Ugh, I thought, this is what I get for being nice. I wrote back a two-sentence email about why I wasn’t interested.

“I’m sorry, but I don’t have a positive forward view on this sector and I am a fund investor not a direct investor, generally speaking. Good luck again with your efforts.”

Of course, I thought that was that. But I was wrong.

What came next was a flurry of information about why my view of the investment opportunity was wrong, any doubts I had about the viability of the sector going forward were likewise incorrect, and how everyone thought this was a great investment opportunity.

My response? Well, I didn’t write one, because at that point I just blocked said marketer, but seriously?!? Does that sales pitch ever work? Do you get anywhere with people by telling them they’re wrong, deluded or just plain silly to not think the same way you do?  Oh, and if everyone thinks it’s a great investment, why do you need to badger me, Sparky? 

You may think this particular sales pitch is unique, but it happens more often than you realize. I probably have at least two or three conversations with fund marketers along these lines each year, and a larger number that are more subtle, but essentially from the same playbook. Yep, it’s a veritable treasure trove of email exchanges, phone calls or meetings where someone I don’t know’s passion for the investment strategy and certainty of its success is supposed to overcome any logical objection or lack of interest on my part.

It. Never. Works.

There has never been a moment when, on the spur of the moment, I’ve exclaimed “Gee willikers! You’re so right! How could I not have seen how wonderful this opportunity is before now! You’re so smart and patient (not to mention handsome – Oops! that’s online dating world flashback again…) to take time to school me on this. Let me send you a wire RIGHT NOW.”

This is not to say I’ve never changed my mind about a fund, but it has literally never been a “Road to Damascus” moment. There is often a catalyst or a period of prolonged and thoughtful study/review that leads me to reverse course.

In fact, the more someone discounts a reasoned opinion, the more intractable I become. And it sometimes, as in the case last week, can even lead to the capital raising penalty box – aka my junk mail folder.

So to all you fund marketers out there, and managers who pull marketing double-duty, take a moment to think through your last several pitches. How did you handle questions, objections and strategy pushback? Did you slow your roll or attempt to “sell” the idea anyway? If you pushed for the sale, you may find yourself without a date to the AUM dance. Everyone wants to know that they’re heard. By not picking up what an investor is putting down, you’re telling them, either in as many words or more subtly, that what they think doesn’t count - only what you think matters. Taking a step back, and a more educational and collegial tone, may take longer, but it can yield more fruit in the end.

And fund managers, to the extent that you rely on others to do your capital raising and marketing, take a moment every now and again to listen to your marketer’s pitch. Make sure it’s how you want your fund and your personal brand represented, so your personal assets don’t get too lonely in your fund.

What George Carlin Can Teach You About Pitch Books

In 1972, George Carlin first performed his now infamous Seven Words You Can Never Say On Television. In case you’ve never watched it, this hilariously foul yet informative bit of comic genius provided clarity around the words that could be used on TV and in polite society, as well as some noteworthy use cases. It was both provocative and spot on, so much so it was later used as the basis of a 1978 Supreme Court case (Federal Communications Commission V. Pacifica Foundation) that still governs the use of “obscene” language on television.

In the skit, Carlin famously laments that no one tells you what the 7 deadly words are, and that as a kid, you simply use them and get slapped, providing your clues as to what constitutes acceptable public language.

Unfortunately, the same is true for money managers. It seems no one has officially shared with them the language that is and isn’t acceptable for use with potential investors. So, rather than letting them get slapped around (or waiting for a Supreme Court ruling), I thought it might be helpful to review the Seven Phrases You Can Never Say In Pitch Books. 

1)   “Our goal is to generate excess returns over a three to five year period with less volatility than the index.” C’mon people. Surely you can do better than this lawyerly non-speak? What on earth does an investor learn about your fund from this phrase? And frankly, how on earth is it different than any other fund on the face of the planet? Do you think that there are funds that write “our goal is to underperform the index over the long haul?” Obviously promising specifics, particularly pie-in-the-sky performance targets, can get you in a heap of trouble with both investors and regulatory bodies, but if you can’t be more specific than this, just do without.

2)   “A significant portion of the manager’s assets are investing in the Fund.” This is a tricky one. Frankly, no investor is going to invest with a manager who isn’t eating their own cooking, so it’s worth saying. But because managers’ are savvy to this, almost none of them would be silly enough to NOT invest in their own fund, rendering the phrase fairly ubiquitous. In addition, if the fund is super small (<$5 million), investors are going to wonder if there’s any outside capital in the fund. And finally, why aren’t all of the manager’s liquid assets in the fund? What is the definition of “significant?” Do other fund personnel have skin the game? This generic statement frankly raises more questions than it answers.

3)   “Our team has 150 thousand years of combined investing experience.” Yeah…about that. What really matters when it comes to experience is that this isn’t your first rodeo and that you’ve in fact been to more than one over the years. If you’ve only seen one market cycle, bulking up experience levels by compounding it with your CFO, COO, IR and other senior staff is pretty hollow. If you’ve been around the block a time or two, maybe you should highlight the trigger-puller's specific experience, not that of the entire team?

4)   “Our competitive advantage is our bottoms-up research.” Two things here. One – bottoms up is a toast, not a research methodology. Two – don’t you think every manager can say the same thing in a way? Do you think there are managers who write: “we just make freaking guesses or pick companies based on whether we like their advertisements?” If you can’t point to something that makes your process truly unique, you may be in trouble.

5)   “We use quantitative and qualitative screening as part of our investment selection process.” Again, you and almost everyone else, buddy. Can you be a bit more specific here? How does the quantitative screen work? What factors does it consider? Is it proprietary? How long has it been in use? Has it seen more than one market cycle? Who maintains it?

6)   “We run a high-conviction portfolio.” This is actually a fine statement, if you are actually running a concentrated, high-conviction portfolio. For the record, if you have 30-40 investments or more, you ain’t.

7)   Quotes by anyone. Including you. Your pitch book isn’t the place to be quoting other investors, economic theory or (true story) the Bible. It’s the place where you describe, in as precise yet glowing terms as possible, who you are, what you do, why you’re good at it and what your results have been. Period. Anything else is a distraction. If an investor wants to read some pithy quotes, that’s what the Internet is for. Oh, and quoting yourself…seriously?

So there you have it folks, the Seven Phrases You Can Never Use In Pitchbooks. Heed them, or risk getting slapped around by potential investors.

And for those that would like a trip down dirty word memory lane, here's a link to the infamous Carlin skit. NSFW. https://www.youtube.com/watch?v=kyBH5oNQOS0

Call Me Maybe

Dialing for dollars. It was all so much easier before Caller ID. 

Now money managers have to wonder "Have I called too much?" and "Is now a good time to talk?" and "Is this investor ever going to pick up the damn phone?"

While investors fret "Will this fund manager ever stop calling me?" and "Sacramento...who do I know in Sacramento?" and "If I let it go to voice mail one more time, does that make me a bad person?"

To help investors and managers navigate the tricky capital raising call landscape, I've created the following decision trees to help fund managers know when it's ok to call, and when investors should (and shouldn't) pick up.

Happy smiling and dialing! And may the odds be ever in your favor!

(c) 2017 MJ Alternative Investment Research

(c) 2017 MJ Alternative Investment Research

Whip It Good

I recently started training to become a roller derby referee.

You read that right. In my spare time, I plan to sport a really loud whistle and to wear a black and white striped shirt with my chosen roller derby moniker emblazoned on the back. Bonus points for the loyal reader who guesses what that might be.

You see, I’ve been a fan of roller derby for years. I loved the movie “Whip It” and, shortly after seeing it for the first time, discovered that Nashville has its own Rollergirls team. I’ve been going to bouts ever since. Mock me if you will, but I would argue that there are few better evenings of sports entertainment to be had. It’s cheap. There are nachos and beers bigger than my head. In addition, roller derby names bring in a hefty dose of humor - one opposing team actually had a player named, I kid you not, “The Other White Meat.” Basically, it’s all around good, clean fun, with just a hint of sex and violence. How can you lose?

On my first night of official practice, I realized that all of my beer-fueled nights of watching roller derby had ill prepared me for actual officiating. While I was familiar with the basic rules, there were dozens of arcane guidelines that one would never notice from the stands. For example, a player sitting or standing in the penalty box can remove their mouthguard, but if they skate towards the track with it out, that’s a penalty. Skaters choose their own one- to four-digit player number, which are always said as individual digits (Player 1-3-3-7 versus Player 13-37). Luckily, breaking that rule won’t earn you a penalty, but it may merit a dirty look from a player named Winona Thud. 

(c) 2009 Mandate International "Whip It"

Some of the rules, particularly ones I kept screwing up, seemed a little silly to me, and, being the Type A jerk I can sometimes be, I felt compelled to question a few. That earned me a few additional dirty looks. At one point the head official said, “yeah, it’s kind of peculiar, but that’s just the way it is.”

After I got home that night, I started thinking about the arbitrary rules in other parts of my life. Investing obviously has A LOT of very specific rules and regulations, most of which have been handed down by various regulatory bodies. Some of them make perfect sense to me (providing net versus gross performance to current and potential investors, for example), while some seem designed merely to make me crazy and to create and sustain compliance jobs.

But in addition to the codified (and omnipresent) regulations in investing, there are a host of informal norms and mores, as well as some basic unspoken tenets. And, at the end of the day, understanding the entire greasy burrito of investing lore is critical to navigating investment terrain without losing your sanity.

For example, even though there’s no rule (or glaring Rollergirl named “Lil Red Right Hook”) to dissuade them, most managers know by now NOT to make their pitch book too long, but what about color schemes? Did you know you generally shouldn’t have a red logo or typeface (red connotes losses)? And make sure you get in front of investors, but realize that you’re probably going to be judged if you’re out and about at conferences and events too often (who’s minding the portfolio?). Follow up but don’t be pushy, oh and, by the way that fine line may vary from investor to investor. Don’t let an investor read bad news in the press. And so on.  And so forth.

Most of us that have been in the industry for long enough have digested these kinds of particulars and therefore navigate the industry fairly seamlessly. But I still often see one great divide between investors and managers when it comes to the accepted rules of play, and it has to do with the starting line.

Many investors approach investing from a place of “no,” while many, if not all, fund managers, approach investors from a place of “why the hell not?”

A fund manager may think: Why wouldn’t an investor want to talk about my fund with me? Why wouldn’t an investor trust me with their capital? Why wouldn’t I deliver satisfactory results? Why wouldn’t this strategy make sense right now? Why wouldn’t an investor want to buy on a drawdown – buy low, sell high, right? Why wouldn’t an investor have liquid funds to allocate to me now? If I just keep up the conversation, I know they’ll eventually come around. I know there are a lot of funds out there, but this is just one more, right?

An investor may think: This is the 20th long-short equity (core fixed income, SMID-cap) fund that’s contacted us this month. That manager lost a lot of capital at a prior fund. That fund doesn’t have the right infrastructure. That fund is too small to safely absorb our investment. That fund has too little capacity for us to scale up appropriately. That manager has been underperforming of late – there’s headline risk and career risk, and what if it’s not a buying opportunity but a sign that the manager isn’t talented? That’s a strategy we’re not interested in/over-allocated to right now. We’re using mostly passive investments for that part of the portfolio. We don’t have liquidity to make new investments without redeeming from existing investments. I don’t know how many more times I can tell this fund no. There are thousands of funds out there, and this is just one more.

Even though it’s frustrating, even though the response you get may not be the one you think you deserve (or what you think you’d do in the other person’s shoes), even if you don’t like it, that’s just the reality of the investing world. And it’s really important to have a little empathy about the realities on the other side of the fence. It can save you time, energy and perhaps even a little time in the penalty box. 

Word Up!

Do you give good monthly letter? Do investors and prospects read your periodic missives or do they end up screened into the junk mail folder? Read on for how to make your monthly commentary more effective (and more widely read)! 

Running On Empty

I love this time of year. The airport delays. The wonky weather. The smell of burning dust in the heating vents. Snow panic that empties grocery store shelves of white bread and whole milk, even if the temperature is stubbornly in the 40s.

Oh, and the look of shiny hope on the faces of fund managers everywhere. 

Ahhhh.....

But before conference season road trips get too far underway, it's probably a good idea to think about where managers are spending their (finite) fund raising resources and where they could ease up on the gas. 

(c) MJ Alts

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

2017 Is Still Warm...I Can Turn It Around & Take Us All Home

When I was a young lass in Nineteen Never Mind, I used to spend Christmas Day with my mom and the week after Christmas with my dad. He would come for my sister and me in Tuscaloosa, Alabama and drive us all the way to Ft. Worth, Texas for another week of holiday overeating and unwrapping.

It was about a 12-hour drive, door to door, but we tried to make the best of it. My sister, stepbrother and I would clamber into the “way back” with a cooler full of Cokes,bags brimming with healthy snacks like Pop Rocks, potato chips and Slim Jim’s, nestled securely next to my Dad’s Coors that he snuck over state lines, Smokey & the Bandit-style. There, we’ll loll about (with no seatbelts), stuffing our faces (not dying from the Pop Rock/Coke combo) and alternate singing, sleeping and snarking at one another for the entirety of the 12-hour trip.

At some point, we would inevitably get on my Dad’s nerves. There would be over-the-seat, disjointed swats, strong language and finally a threat to “TURN THIS DAMN CAR AROUND AND TAKE EVERYONE HOME.”

We kids thought that was super funny. 

What wasn’t hilarious, however, was 2016 - an epically craptastic annum bad in so many ways that it even made Mariah Carey’s New Year’s Rockin’ Eve performance look apropos.

So, while 2017 is still barely warm, I thought I’d give it a little, tiny warning.

If y’all pull the same stunts this year that you did last year, I’ll turn this year around and take us all home. At the very least, I’ll figure out how to off everyone using nothing but Pop Rocks and warm Coors. You get me?

What am I talking about specifically? Well, here are some of my key investment industry pet peeves from 2016:

Looking in the same tired places for returns, and then pretending shock when they don’t measure up – Investors from Kentucky to New York and a few states in-between reduced or redeemed their hedge fund portfolios in 2016, based in large part on lackluster “average” returns. While many point to “average returns” in the neighborhood of just under 5% though November, perhaps it’s best to look at how the best (and worst) performers are faring. Articles have shown top performing hedge funds gained 20% or more through November 2016. And over the four quarters ending 3Q2016, top HFRI decile funds gained 29.54%. The bottom decile funds lost 15.57%. So there are funds that have performed strongly over the last 12 months IF an investor was willing to look for them and perhaps take risks on lesser known, newer, nicher or funds otherwise “off the beaten path.” It kind of reminds me of the old joke “Doctor, doctor, it hurts when I do this…” How ‘bout in 2017, we stop doing that, lest it continue to hurt.

Using “averages” to talk about investment funds, particularly alternative investment funds – Speaking of, with the kind of return dispersion above, why don’t we stop talking about “average returns” full stop. Even when it comes to white-bread mutual funds, getting fixated on “average” returns doesn’t really help. How do I know? One of the top, non-indexed US mutual funds returned 30% in 2016. Yeah, I said 30-freakin’-percent, more than twice the return of the S&P 500. But by fixating on “average return,” no matter what the asset class, investors may in danger of writing off entire investment strategies based on normalized returns that don’t accurately represent reality. In 2017, let’s focus more on the opportunities unveiled by return dispersion and less on pesky averages, shall we? Oh, and the same thing goes for fees discussions, too.

Saying you want to hire diverse talent, but complaining that you “just can’t find any” – So I’ve heard (or read about) more than one asset management firm complain about how they’d “love to hire women and minorities” but they “just can’t find qualified applicants”, and they’re not willing to lower their standards. Come. On.

Women comprise 50.8% of the U.S. population according to the Census Bureau. Minorities make up nearly 23% of the U.S. population. Do some simple math on the number of women and minorities in a population of 323,127,513 and it boggles the mind that there are ZERO qualified diverse applicants.

Indeed, when I read or hear this, one of a few questions generally comes to mind:

1. How homogenized is this person’s personal network and how might that impact other investment research and decisions?
2. How much effort does this person put into finding diverse candidates? Do they contact recruiters who specialize in the area? Do they go to conferences put on by 100 Women in Hedge Funds, NASP, the NAIC, and others?
3. If there is a pipeline problem in this person’s line of work and they genuinely want to fix it, what are THEY doing to fix this issue in the long-term? Do they bring in diverse interns? Diverse entry-level positions? Do they promote these individuals?

Inappropriate benchmarks – Why, oh why, do we benchmark every damn thing to the S&P 500? It’s become so pervasive that I just caught myself doing it above (the top performing mutual fund invests in small caps, not S&P-level stocks) and I know better. Just because it’s well known, and just because it’s been crammed down our throats by everyone from consultants to financial advisors, doesn’t mean it always fits. Small cap fund? Ixnay on the S&P-ay. Hedge funds? Can’t be expected to outperform in bull markets because they are HEDGED. Private equity & venture capital – comparing illiquid investments to a liquid benchmark seems a bit silly, no? So in 2017, let’s either agree to benchmark appropriately so we can make a sober decision about whether an investment has performed well (or not) OR let’s just decide to sell everything and invest only in the S&P 500, since it’s where it’s at, obviously.

Communicating inappropriately – This may be just a “me” thing, but in 2016 I noted an increasing number of asset managers who text investors. What. The. Actual. Hell. Texting is informal. Texting is immediate and insinuates you deserve an instant response. Texting invites typos. Texting doesn’t allow for compliance review or disclaimers. Unless you are meeting someone that day and need to say you’ll be late, early, or identifiable by the rose in your lapel, or unless that investor has given you express permission to text, don’t. The investors I know who put their mobile numbers on their cards are coming to regret it. And if you lose that, you’ll only spend more time waiting on callbacks.

So cheers, all, to a happy, healthy, prosperous, properly benchmarked 2017. May we lose fewer of my 80s idols and more of our investing bad habits.

Sources:

https://www.bloomberg.com/news/articles/2016-12-29/hedge-fund-agonistes-not-even-donald-trump-can-ease-the-pain

http://www.valuewalk.com/2016/12/new-hedge-fund-launches-fall-total-capital-increases-record/

https://www.bloomberg.com/view/articles/2016-12-29/the-year-s-top-stock-picker-didn-t-follow-the-news

https://www.census.gov/quickfacts/table/PST045216/00

Photo credit:

Copyright: <a href='http://www.123rf.com/profile_artzzz'>artzzz / 123RF Stock Photo</a>

Lenny Bruce Is Not Afraid

November has been, at least thus far, a month of surprises.

You know that curse on the Chicago Cubs? Surprise! They won the World Series.

Didn’t I just see a Facebook post on a local norovirus (aka the stomach flu) outbreak? Surprise! I temporarily had to rename myself Vomitola Khomeni – and finally found that button I ate when I was three…

Hey! Do you remember all those polls that showed Democrat Hillary Clinton easily winning the White House? Surprise! Donald Trump is the 45th President of the United States.

Oh, and of course you recall all the dire predictions for the stock market should Donald Trump win the presidency? Surprise! The Dow Jones Industrial Average was trading in record-making territory a mere two days later.

To be honest, while I did spend much of the first part of the week “enjoying” my virus-induced weight loss opportunity, I also, if somewhat dimly and feverishly, realized that collectively we have done a terrible job of predicting recent events.

I know many in the financial industry had to have been stunned and dismayed by the election results. According to an October 26, 2016 article in Fortune, Trump raised $239,250 from hedge fund and private equity firms, while Hillary Clinton raised $45.2 million from the same groups. Charles River Ventures, a Silicon Valley venture capital firm even went so far as to entitle a blog posting “F*CK TRUMP.” Even though Republicans in other races enjoyed healthy and widespread financial industry support, it just wasn’t there for Trump.

As a result, for many people, last Wednesday morning must have seemed like the end of the world (as we know it). And while I didn’t notice any birds, there were even “snakes and aeroplanes” for any still doubting the seriousness of the situation. (https://www.theguardian.com/environment/2016/nov/08/snake-on-a-plane-passengers-flight-mexico-city) 

So where do we go from here? How does the investment industry successfully navigate the new normal and survive and thrive in a new world order? Here are a few thoughts I had that may help investors and managers both do good while they do well.

One: Don’t Say Or Write Anything That Endangers Your Current AUM

This was a contentious election. Combative. Testy. Belligerent. Factious. Antagonistic. Insert every single synonym for “unpleasant and argumentative” you can come up with here, because no matter how you slice it, the 2016 political campaign was a dumpster fire, starting with the Republican and Democratic primaries and continuing through the general election. It. Was. Not. Pretty.

As a result, there are a lot of very strong post-election feelings on both sides of the aisle.

And as we extend our personas over Facebook, Twitter, Blogs, Instagram and other platforms, there has simultaneously been a reduction of social restrictions and inhibitions known as the “Online Disinhibition Effect.”  It makes us more likely to say, write or post things that we likely wouldn’t have before.

When you combine those things – deep disappointment, hurt feelings and increased disinhibition – you end up with an improved likelihood of offending someone, inadvertently or otherwise. And when you seriously offend a client or prospect in this industry, your AUM suffers.

So lock down your Facebook account if you post politically on it. Don’t assume you know what someone’s views may be unless they’ve actually told you what their views are. In fact, to the extent that politics and social issues don’t impact your investment strategy or portfolio, don’t talk about them in professional settings. At all. Better safe than sorry because it’s easier to keep a client/investor than to acquire a new one.

Don’t believe me on this one? Ask Matt Maloney, who’s firm, GrubHub, suffered share price losses of 9.4% in the two days after the election over a leaked internal communiqué. Shut. It.

Two: Consider Diversity In Hiring and Investing

This election cycle has been, at least in part, about disenfranchisement. Trump likely won the election due to the disenfranchisement of the white, working class rural voter, while those who fear pending disenfranchisement (minorities, women, immigrants, LBGTQ) have fueled protests post-election.

The good news for investors and money managers is that inclusion will ease disenfranchisement, and it can also make everyone richer, too. Here’s how:

• Deszo & Ross studied the effect of gender diversity in the S&P 1500 and found that “female representation in top management leads to an increase of $42 million in firm value.”
• Orlando Richard found in his study that for “innovation-focused banks, increases in racial diversity were clearly related to enhanced financial performance.”
• Catalyst found that Fortune 500 companies with the highest representation of women board directors had significantly higher financial performance than those that don’t.
• Morningstar found that mixed-gender mutual fund teams outperformed single gender teams.  
• The HFRI Diversity Index (+4.21%) has outperformed both the HFRI Fund Weighted (+3.59%) and HFRI Asset Weighted (1.31%) indices for the year to date through October.
• In a paper by Stanford professor Margaret Neale, diversity and intellectual conflict proved good for organizations. “When…newcomers were socially similar to the team, old team members reported the highest level of subjective satisfaction with the group’s productivity. However, when objective standards were measured, they performed the worst on a group problem-solving task. When newcomers were different, the reverse was true. Old members thought the team performed badly, but in fact it accomplished its task much better than the homogenous group.”
• Diversity includes “Functional Diversity” or “the extent to which individuals frame problems and go about solving them.” As a result, age, background and life experience should also be considered aspects of the diversity equation.

Certainly, in a rapidly changing world, having better problem solving skills and potentially better returns has to be a good thing, right? So cast a wide net when hiring staff or money managers going forward to maximize your cognitive alpha.

Three: It’s Still A Great Time To Focus On ESG Factors

So, early reports have the newly-elected administration throwing out both the Environmental Protection Agency and the CFPB, as well as doing away with Dodd-Frank, among other regulatory changes. While it’s too early to know whether and when that can or will happen, there are a few things we do know:

• 49% of high net worth (HNW) millennials (yes, they exist!) say that social responsibility is a consideration in investing. 53% of all millennials agreed. 43% of HNW GenX also consider social responsibility in investing. Due to demographic shifts in the workplace (these groups of workers are now larger than Boomers) and the looming generational wealth transfer, it probably makes sense to develop products that cater to these interests sooner rather than later.
• Bauer, Frijins, Otten and Tourani-Rad found “well-governed firms significantly outperform poorly governed firms by up to 15% a year” in their paper “The impact of corporate governance on corporate performance: Evidence from Japan.”
• A Wharton paper from 2012 shows a “positive association between corporate governance and performance…and evidence that higher corporate governance leads to an increase in cash dividends.”
• Exxon spent $2.1 billion cleaning up the spill from the Exxon Valdez, which, while recoverable, ain’t great for a company’s bottom line.
• Wells Fargo’s recent governance gaffe could cost the company up to $4 billion in revenue.
• GrubHub’s “hostile workplace” internal email has led to a boycott and a drop in share price.

It seems reasonable that ignoring ESG factors can cost you both potential returns and clients, and possibly increase portfolio risks. And even if there aren’t dedicated regulations or government bodies watchdogging, it also seems reasonable to assume that many investors (and the markets) WILL still care.

Four: Don’t Make Any Sudden Investment Moves

The Sunday before the election, I had a sudden Han Solo moment (“I’ve got a bad feeling about this…”) and decided that I needed to think about buying an inverse S&P ETF. I gave myself 24 hours to ponder and ultimately decided to stay my current course and not change anything in my investment portfolio. Lucky me, right? That single choice would have cost me. Bigly.

Humans want certainty. In a study published in Nature Communications, knowing there is a small chance of getting an electrical shock causes more stress than knowing you’ll be shocked.

Shocking!

But seriously, when you’re feeling uncertain about your investment strategy, take a moment. Take a walk. Take a breath. Take a sip. Take whatever step back you need before making any sudden investment decisions. Whether you’re an investor or a money manager or just a Star Wars fan with a retirement account, it’s important to remember that we generally invest for the long-term. Don’t risk your long-term goals chasing short-term “certainty.”

As for me, I’m taking my own advice. Right after I get back to my 80s roots, dig out my mismatched Converse high-tops from the very back of the closet, and have a 3-minute R.E.M.-party to dance it out. I invite you all to do the same.

Sources: http://fortune.com/2016/10/26/trump-hillary-clinton-hedge-fund-campaign-finance/

http://seekingalpha.com/news/3223875-grubhub-minus-5_8-percent-following-ceos-anti-trump-commentary

https://www.scientificamerican.com/article/how-diversity-makes-us-smarter/

http://www.catalyst.org/media/companies-more-women-board-directors-experience-higher-financial-performance-according-latest

http://corporate.morningstar.com/US/documents/ResearchPapers/Fund-Managers-by-Gender.pdf

https://www.hedgefundresearch.com/family-indices/hfri#

https://www.gsb.stanford.edu/insights/diverse-backgrounds-personalities-can-strengthen-groups

https://www.ncwit.org/resources/how-can-organizations-recruit-diverse-talent-ways-promote-innovation-and-productivity/how

http://fic.wharton.upenn.edu/fic/papers/12/12-14.pdf

http://www.evostc.state.ak.us/%3FFA=facts.QA

http://www.cnbc.com/2016/10/24/wells-fargo-fallout-could-tally-4-billion-dollars-in-revenue-up-to-30-percent-customer-drop-study-says.html

https://www.ucl.ac.uk/news/news-articles/0316/290316-uncertainty-stress

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

Seed Me, Seymour!

Every time I turn around, I find a manager looking for seed capital. Many are frustrated with what I like to call "second dollar syndrome" - the fact that everyone seems happy to be the second dollar in your fund, but few want to commit the first dollar - and dream of a seed investment as a way out of the fund raising drudgery.

If you're on the early-stage capital trail, it can be helpful to understand the nuance of seeding and acceleration capital so you know better when to hold 'em and when to fold 'em, know who's 'bout to walk away and who's there to fund. So here are a few pointers that apply to seed and accelerator capital (even if it just says seed in some spots for brevity's sake) that I hope lead you to your own vat of miracle grow.

(c) 2016 MJ Alts

Kicking The Buckets

Ever since that mawkish movie starring Jack Nicolson and Morgan Freeman came out in 2007, it seems people can’t stop talking about their “bucket lists”. There have been songs written about the topic (“I went 2.7 seconds on a bull named Fu Man Chu...”), Internet memes created, and the phrase has completely wormed its way into our day-to-day chatter (Ooooh! Going to Thailand is totally on my bucket list!).

In full disclosure, I actually hate both the phrase and the concept of a bucket list. I try to do and say the things I want in the moment, rather than wait for my impending death to be a motivating factor. Right now, the only things on my bucket list are 1) get a tattoo (impending death will remove my long-term tattoo commitment-phobia); and 2) write a salty tell-all about the investment industry that is equal parts Bridget Jones Diary, The Office and Game of Thrones.

With that last goal in mind, some of you out there should be wishing me good health and longevity every darn day. But I digress.

Based on my knowledge of human behavior, I can’t say I’m surprised about our love of the bucket list. We love, love, love to put things in buckets and boxes and to create certainty where there is none. Studies have shown that uncertainty actually causes more stress than actual pain. And, after all, what’s more uncertain than death? So if having prescribed list makes someone feel better about their inevitable demise, maybe it's not all bad, but it is just a coping mechanism. 

Perhaps that also explains our utter fascination with putting investments into buckets. Small Cap, All Cap, SMID Cap Growth. Early Stage, Seed Stage, Growth Stage. Event Driven, Special Situations, Trend Following. Whatever the investment strategy, investors look for ways to group supposedly “like” managers together to streamline the investment process.

But does that actually help or hurt us?

Putting investments in boxes is theoretically easiest in the long-only world. After all, we have ACTUAL boxes in which to put investments thanks to Morningstar. No matter what a manager does, they usually comfortably squeeze into a pre-defined style box, giving investors not only information on what the fund does, but also on how it does, thanks to agreed-upon benchmarks.

But is looking for managers in those boxes to an investors benefit? Martijn Cremers of Notre Dame says “no.” In his analysis of long-only managers he found that the more a manager fits into a box, the more certain an investor could be of one thing: failure. Not surprisingly, benchmark huggers have little opportunity to outperform their, um, benchmark, since they may be holding the same stocks in the same amounts within their funds. So instead of looking for these closet indexers, who make us feel certain and warm and secure (and later, ultimately, poor), Cremers argues investors should be looking for managers who have 40% or less of their holdings in common with their benchmark, and that hold any common holdings in different proportions. While this doesn’t guarantee outsized returns, at least it opens the door to them.

And the bucket story is similar in the alternative investment world.

If I had a dollar for every time an investor or researcher tried to shoehorn a hedge fund into a specific investment bucket, I could probably take time off to write my tell-all.

But the thing about hedge fund strategy buckets is that they are pretty craptastic. It is nigh on impossible for a database or index provider to provide enough granularity into strategies without overwhelming users with a huge number of strategy categories. Historically, the number of hedge fund "buckets" has ranged from a low of about 9 to a high of 100. The former ends up lumping very disparate funds together and the latter is too complex for the average investor to utilize. The result? An imperfect system that, if taken as gospel, can bite an investor in the arse. 

Take, for example, a hedge fund I know well that trades across the capital structure in distressed companies. One group put them in the Distressed bucket. One group put them in Event Driven. One group put them in Multi-Strategy.

Which group is right?

Well, all of them. And none of them.

Hedge fund strategy buckets are catch-alls. They are designed to create some amount of cosmos from chaos, but laser accuracy isn’t their strong suit. You can have all sorts of nuance within a broad category like Equity Hedge, just like you can have all sorts of nuance within a single fund. And no, that’s not “style drift.”

So let’s say an investor decides to look for an Event Driven fund. In their dataset, the fund above is classified as Distressed. They do their search and the fund never pops up, even though it could be just what the investor is looking for. How does that help anyone?

It doesn’t.

And let’s say that a hedge fund is classified within a certain strategy bucket but has a more nichey or nuanced, or even totally unrelated strategy. They may get benchmarked to their strategy bucket, which ultimately has little to do with how the fund actually invests. An investor who relies too heavily on that information could make poor investment or redemption decisions, too.

Again, not helpful.

So I guess I can add one more thing to my bucket list – kicking the (strategy) buckets. While I admit they are probably here to stay, I urge investors to take them with a large grain of salt, perhaps even a salt lick-sized grain. If you must use strategy boxes or buckets or Rubbermaid containers in your investment process, be sure to search adjacent or related strategies when looking for managers. Create blended or custom benchmarks. Don’t let benchmarks make investment decisions. Allow room for nuance and opportunity.

In other words, use buckets the way God intended – for ice and a nice bottle of bubbly and use that to help accept that a little uncertainty can be a good thing.

Sources: http://www.investmentnews.com/article/20160421/BLOG12/160429985/the-active-management-edge-is-found-furthest-from-the-benchmark

https://www.sciencedaily.com/releases/2016/03/160329101037.htm