Good Riddance 2016, Hello 2017!

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

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

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

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

See y’all next year!

Hedge Funds (Don’t) Suck

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

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

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

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

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

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

Behavioral Finance

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

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

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

Diversity And Investing

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

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

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

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

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

Emerging Managers and/or Capital Raising

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

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

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

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

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

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

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

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

Random Musings

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

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

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

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

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

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

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

ESG/Socially Responsible Investing

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

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

The Five Stages of Emerging Manager Grief

Even if the songs tell us it's the most wonderful time of the year, when bells will be ringing and children are singing, for many emerging fund managers, the holidays may simply be the end of another  difficult year of fundraising. To help you navigate any holiday season depression and just maybe put things in perspective a bit, I've put together a guide to managing the 5 Stages of Emerging Manager Grief. I hope it (combined with a lovely hot buttered rum) eases you through the holiday season. 

(C) 2016 MJ Alts

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

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

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

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

Color me PTSD’ed. 

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

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

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

Ho-lee-shit.

My mind started racing.

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

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

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

And then I realized something.

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

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

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

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

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

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

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

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

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

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

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

Take a step back.

Breathe.

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

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

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

A Picture Is (Almost) Worth 1,000 Words

This week, I decided to spare everyone my usual delivery of salty commentary on the investment arena and instead, use two pictures to say my 1,000 words.

So here's this week's blog in cartoon format. Of course, as badly as I draw and with the economic outlook uncertain, these may actually only be worth 500 (or even 5) words. But hopefully you'll get my general drift that:

1. Asset managers can limit themselves by pursuing the biggest, splashiest and easiest to find investors, and
2. Investors can limit themselves by not casting a wide enough net when looking for investments.

Oh, and apologies to Raiders of the Lost Ark...although maybe this attempt at spoofing humor will inspire you to watch it again. 

(c) 2016 MJ Alts

(c) 2016 MJ Alts

Great Expectations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And Now For Something Completely Different...

How many times have you sat through a panel presentation at an investment conference only to be bored out of your damn mind by one session or another?

The topic of the session doesn’t matter. It can be a session on anything from the tax treatment of investments to investors writing actual checks to fund managers on stage - investment porn if you will. 

Indeed, there is only one thing that can kill a panel discussion faster than Raid kills roaches: overwhelming consensus.

“I agree with the prior panelists that (restate what you’ve just heard).”

“I agree with the prior three panelists that (restate again what you’ve just heard two times already).”

“Bob, do you have anything to add here?” “Well, I actually agree with Pat and Mary and that gentleman in the audience…”

C’mon, you know you’ve been there. And whether you’re in the audience or actually on the conference stage, a part of you wants to pick up a chair, throw it, and start chanting “Jer-ry! Jer-ry! Jer-ry!”

Ok, maybe that’s just me.

Now don’t get me wrong, generally I’m a fan of consensus. Consensus over where to eat dinner, what bottle of wine to order, whether or not a particular outfit makes my butt look big - these are good things on which to have input and universal agreement.

But when it comes to investing, I look for a few renegades, rogues and innovators and prioritize utility over unanimity, potential benefit over style and strategy boxes, because that's where excess value lives. 

Last week, Palgrave, the publisher of my 2015 tome Women of the Street: Why Female Money Managers Generate Higher Returns (And How You Can Too), and I launched a Twitter poll. Roughly 130 Tweeters (Twitterers?) responded to the question: “Why do you think gender diversity is important in investing is important?”

This multiple-choice poll offered the following options for answers: Underrepresentation, Higher Returns, Diverse Behavior/Views, and Not Important.

The winning answer (39%) in the poll was “Diverse Behavior/Views”, which was great because that’s essentially my book in a nutshell, and I love the smell of validation in the morning.

I was, however, somewhat stunned that the second most popular answer (30%) was “Not Important.”

Uh, what? How can diverse views and behavior NOT be important in this industry? After all, the investment industry is overwhelmingly Caucasian, male and 35+, and the fund landscape (no matter what the asset class) is dominated by a few large investment firms …and if that ain’t a prime breeding ground for painful consensus, I don’t know what is.

Look, it’s undeniable that some level of consensus is necessary in investing (otherwise you will own a stock, company, bond or other instrument that never increases in value 'cos no one agrees with you about the value), but when we drift towards overwhelming consensus, I believe our ability to make money is diminished. And nothing pisses me off like missing out on returns.

Let’s take venture capital, for example.

• Data from the Martin Prosperity Institute shows that 25.3% of venture capital is invested in San Francisco/San Jose.
• Data from Forbes/Statista shows that 36.2% of venture capital is directed towards software companies, with another 17.3% going into biotechnology.
• And data from PitchBook shows that 45% of venture capitalists with MBAs matriculated from Harvard, Wharton or Stanford.

That's a whole heapin' helpin' of consensus. 

To oversimplify a bit, that means you end up with a Venn Diagram of geography, network and industry that looks a lot like the one below, where anything that is overlapping spells some level of competition (higher valuations, similar concepts, etc.). 

(c) 2016 MJ Alts

But start to change even one thing around and you could end up with increased opportunity. What if you look at the same industries and you went to Harvard, but you focus on, I don’t know, the Southeast, for example? Would it make sense that you might find some highly interesting investments that others might not, or are all the good ideas on the coasts? Or maybe you change your network. With so little capital directed to women and minority entrepreneurs, what if you cultivated a different network (or hired people with differentiated networks) to find out-of-the-box opportunities? Could that open up a new avenue for excess returns? The capitalist in me says, “Yes!” Differences can be good.

(c) 2016 MJ Alts

The same types of things happen in other parts of the investment spectrum, too. I’ve discussed in prior blogs research showing that long-only “benchmark huggers” have less chance of outperformance, (http://www.aboutmjones.com/mjblog/2016/5/3/kicking-the-buckets) and if you think about it, the same should generally be true for hedge funds.

For example, equity hedge funds make up roughly 30% of the overall hedge fund universe by number, and roughly 40% by assets under management. Many of these funds focus on US investment markets, and the vast majority are also managed by white males. This creates a universe of funds that potentially has a similar universe of investment opportunities, similar information available and similar behavior patterns, which can limit outperformance. By modifying one aspect, behavior for example, could we open ourselves up to a differentiated or even higher return? What if we looked at *truly* different strategies? What if…?

(C) 2016 MJ Alts

(c) 2016 MJ Alts

Now, don’t get me wrong. I am not anti-anything that generates (or exceeds) my expected return, and the reason that assets tend to concentrate the way they do is that those firms, industries, strategies, etc. often have a history of success.

But as an industry watcher, I can’t help but wonder what kinds of returns would be possible if investors and asset management firms changed their perspective just a bit and took a road less traveled every once in a while. If we wondered less about how much an investment or new hire or strategy looks like past success and instead asked how it is differentiated and could contribute to our overall success. I’m guessing we’d end up with increased diversification, higher returns and a myriad of other tangential benefits, not the least of which is fewer torturous panels. 

Sources:http://www.theatlantic.com/technology/archive/2016/01/global-startup-cities-venture-capital/429255/ , http://www.forbes.com/sites/niallmccarthy/2016/06/27/which-industries-attract-the-most-venture-capital-infographic/#4b07db986778, https://pitchbook.com/news/articles/harvard-4-other-schools-make-up-most-mbas-at-pe-vc-firms

Capital (Raising) Crimes & Punishment

With hot weather upon us, more folks out of the office, and a truncated conference schedule, it's easy to get frustrated with the capital raising process. Before you start hating the players *and* the game, make sure you're not committing any capital (raising) crimes and putting your own asset raising efforts in the pokey.

(c) 2016 MJ Alts

Are You Hot or Not?

Please note the MJ Alts blog is now posted on the 1st and 3rd Tuesday of each month. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

42

All The News That Was Fit to Print (And Some That Wasn’t)

As y’all recover from the excesses of fried turkeys, stuffed stockings, too much ‘nog and an overdose of family time, it seems like a good time to catch up on some light reading. So, in case you missed them, here are my 2015 blogs arranged by topic so you can sneak in some snark before you ring in the New Year.

Happy reading and best wishes for a joyous, profitable, and humorous 2016.

Happy Holidays from MJ Alts!

HEDGE FUND TRUTH ANIMATED SERIES

http://www.aboutmjones.com/mjblog/2015/6/29/hedge-fund-truth-series-hedge-fund-fees

http://www.aboutmjones.com/mjblog/2015/6/1/the-most-hated-profession-on-earth

http://www.aboutmjones.com/mjblog/2015/3/2/the-hedge-fund-truth-launching-and-running-a-small-fund

http://www.aboutmjones.com/mjblog/2015/1/19/savetheemergingmanager

WOMEN AND INVESTING

http://www.aboutmjones.com/mjblog/2015/12/13/dear-santa

http://www.aboutmjones.com/mjblog/2015/11/16/not-so-fast-times-at-hedge-fund-high

http://www.aboutmjones.com/mjblog/2015/9/25/doing-well-doing-good-improving-investment-diversity

http://www.aboutmjones.com/mjblog/2015/7/26/the-evolution-of-a-female-fund-manager

http://www.aboutmjones.com/mjblog/2015/6/10/advice-to-the-future-women-of-finance

http://www.aboutmjones.com/mjblog/2015/4/27/diversification-and-alpha-by-the-book

http://www.aboutmjones.com/mjblog/2015/4/20/excusa-paloosa-the-sad-excuses-we-give-to-avoid-small-funds-gender-diversity

http://www.aboutmjones.com/mjblog/2015/3/8/whats-in-a-name-what-manager-names-tell-us-about-diversity

http://www.aboutmjones.com/mjblog/2015/1/26/dont-listen-to-greg-weinstein

EVERYONE HATES ALTERNATIVE INVESTMENTS (ESPECIALLY HEDGE FUNDS)

http://www.aboutmjones.com/mjblog/2015/12/7/keen-delight-in-the-misfortune-of-hedge-fundsand-me

http://www.aboutmjones.com/mjblog/2015/2/2/mfp1glk0exk0vlnqtpx6lby2ba9z8n

http://www.aboutmjones.com/mjblog/2015/11/23/babelfish-for-hedge-funds-1

http://www.aboutmjones.com/mjblog/2015/11/8/hedge-funds-bad-reputation

http://www.aboutmjones.com/mjblog/2015/10/5/dear-hedgie

http://www.aboutmjones.com/mjblog/2015/9/9/investment-professional-fact-fiction-the-business-trip

http://www.aboutmjones.com/mjblog/2015/5/17/hedge-funding-kindergarten-teachers

http://www.aboutmjones.com/mjblog/2015/4/14/are-hedge-clippers-trimming-up-the-wrong-tree

http://www.aboutmjones.com/mjblog/2015/3/28/hedge-fund-high-entertainment-an-open-letter-to-showtime-about-billions

http://www.aboutmjones.com/mjblog/2015/3/13/venn-dication-what-simple-relationships-do-dont-tell-us-about-alternative-investments

http://www.aboutmjones.com/mjblog/2015/2/16/rampallions-scullions-hedge-funds-oh-my

FUND RAISING & INVESTOR RELATIONS

http://www.aboutmjones.com/mjblog/2015/6/22/swingers-and-the-art-of-investor-communication

http://www.aboutmjones.com/mjblog/2015/4/5/7-secrets-to-a-successful-fund-elevator-pitch

http://www.aboutmjones.com/mjblog/2015/2/9/what-how-i-met-your-mother-can-teach-us-about-hiring-fund-raising-staff

http://www.aboutmjones.com/mjblog/2015/10/26/founding-funders

http://www.aboutmjones.com/mjblog/2015/8/28/crisis-communication-for-investment-managers

http://www.aboutmjones.com/mjblog/2015/7/20/trust-me-im-a-portfolio-manager

http://www.aboutmjones.com/mjblog/2015/5/4/the-declaration-of-fin-dependence

http://www.aboutmjones.com/mjblog/2015/1/11/new-years-resolutions-for-investors-and-managers-part-deux

EMERGING MANAGERS

http://www.aboutmjones.com/mjblog/2015/8/17/people-call-me-a-skeptic-but-i-dont-believe-them

http://www.aboutmjones.com/mjblog/2015/10/19/are-you-the-next-blackstone-dont-count-on-it

DUE DILIGENCE

http://www.aboutmjones.com/mjblog/2015/11/1/the-evolution-of-due-diligence

http://www.aboutmjones.com/mjblog/2015/8/6/a-little-perspective-on-the-due-diligence-process

GENERAL INVESTING INSIGHTS

http://www.aboutmjones.com/mjblog/2015/9/19/misusing-these-popular-alternative-investment-terms-inconceivable

http://www.aboutmjones.com/mjblog/2015/10/11/investment-wisdom-increases-with-age-dance-skills-dont

http://www.aboutmjones.com/mjblog/2015/8/24/the-love-of-the-returns-chase

http://www.aboutmjones.com/mjblog/2015/8/2/slamming-the-wrong-barn-door

http://www.aboutmjones.com/mjblog/2015/6/8/the-confidence-hubris-conundrum

http://www.aboutmjones.com/mjblog/2015/5/10/the-crystal-ball-in-the-rearview-mirror

http://www.aboutmjones.com/mjblog/2015/3/19/fun-with-dots-visualizing-bifucation-in-the-hedge-fund-industry

http://www.aboutmjones.com/mjblog/2015/2/23/pattern-recognition-may-make-you-poorer

http://www.aboutmjones.com/mjblog/2015/1/5/new-years-resolutions-for-investors-managers-part-one

What do you want to read about in 2016? List topics you enjoy or would like to see more of in the comments section below.

In the meantime, gird your loins for the blog that always parties like it’s 1999, even when it’s 2016.

And please follow me on Twitter (@MJ_Meredith_J) for daily doses of research, salt and snark. 

Dear Hedgie:

As a relatively new Tweeter (Twitterer?), I sometimes get questions from followers on a host of topics. In case you were also wondering, here are a few recent answers: Yes, there are almost always song lyrics hidden in my blogs. Actually, my hair is naturally large & no outside intervention is required. And yes, creating this much snark and sarcasm is exhausting.

Last week, I got the following question Tweeted in my general direction:

And while I can’t guarantee maximized profits, dear Tweeter, I can offer a few suggestions to enhance your first foray into alternative investments:

1. Take The Red Pill – The press loves, loves, loves them some alternative investments. And by loves, loves, loves I mean loathes, loathes, loathes. You’ve probably seen articles talking about excessive fees, billion dollar salaries, poor performance, insider trading, Ponzi schemes and other shenanigans and, I’m here to tell you, just because someone scribbled it on newsprint or online, doesn’t make it true. 

Take hedge funds, for example - they aren’t all gypsies, tramps and thieves, whatever you may have read. Fees are closer to 1.5% and 18% than to 2% & 20%. The vast majority of hedge fund managers make nowhere near the $11.3 billion that the 25 largest funds rake in, and are much more sensitive to reductions in fee income than you may think (see also http://www.aboutmjones.com/mjblog/2015/6/29/hedge-fund-truth-series-hedge-fund-fees). Insider trading happens, but is remarkably consistent at about 50 enforcement actions per year (across all miscreants, not just hedge funds). Ponzi schemes have happened but rarely at serious scale (and no, Madoff was not a hedge fund). Average performance of hedge funds has been lackluster but the top performers (who I’m pretty sure are the folks you want to invest with anyway) have generated some outstanding returns, even in the last few years. Don’t believe me? See the distribution of return graphics from Preqin’s latest study. 

Finally, there is no proof that hedge funds cause cancer, despite what the Hedge Clippers may say.

2.   Get a good data sample – One of the key mistakes I see from new investors in alternative investments, especially hedge funds, is the lack of a good data sample. The thing about hedge fund data is there is no requirement for any fund to report any information to any commercial hedge fund database. Period. As a result, the data is fragmented and incomplete. The only incentive for a fund to report to a database is to pursue assets. If a fund isn’t in asset raising mode, has a hearty network of prospective investors, or if the performance of fund is unlikely to attract assets, many funds simply won’t report. In addition, many funds report to only 1 or 2 databases, and if those don’t happen to be the ones to which you have access, well, that’s just tough cookies. The moral of the story? Invest in data. Buy data and gather information on your own by networking, going to conferences and talking to other investors about what and who they like. The only way to ensure you make the best investment decisions is to know what your options are in the first place.
 

3.   Think about what risk means to you – All too often, we try to boil risk down to a single data point. Whether it’s drawdown or standard deviation, we attempt to quantify risk because we feel like what we can quantify we can understand and control, right? Wrong. Risk means different things to different people and each investor will maximize different aspects of risks. For example, one investor may feel their biggest risk is not achieving a certain minimum acceptable return. Another may feel their biggest risk is losing a substantial amount of their investment. Yet another may feel headline risk is their biggest concern. And still another may worry about liquidity. The list is endless. The important thing for investors is to think about their personal (or organizational) definition of risk before making an investment, then identify the risks in any investment strategy as thoroughly as possible and finally determine if the potential upside is worth taking those risks. All investments involve risk. Period. Deciding whether the risk you’re taking is worth taking is up to you.

4.   Get your nose out of your DDQ – Get to know a manager and his or her team not just by grilling them with a long due diligence questionnaire, but by having a real conversation. If you know what’s important to a manager, what drives them, what keeps them up at night, how they got to where they are, what influences them, and how THEY perceive risk you have a much better chance of developing the rapport and trust that is necessary to any successful investment.

5.    Look ahead, not behind – If you’re chasing returns, you are already behind.

6.   Watch out for dry powder and Unicorpses – There is an awful lot of money flowing into private equity and venture capital and a finite number of reasonably priced deals, great management teams and fantastic business plans. Ensure any GP you plan to LP has the DL on deal flow.

7.   There is no I in TEAM – Actually, there is – it’s in the “A” holes. But I digress. My point is there is a lot of work associated with finding and doing due diligence and ongoing monitoring on alternative investments. If you don’t have a robust team, it’s ok to go to folks for help. Funds of funds, outsourced due diligence, OCIO, multi-family offices, operational due diligence firms, and other providers can be a lifesaver to a new or small investor in alternatives. It may not be cheap, but neither is recruiting, training and providing salary, bonus and benefits for an entire specialized team. Weigh what you can do in house against what you can easily outsource and spend the most effort on the voodoo that you do so well and money on the stuff that isn’t the best use of your time or expertise.

So there you have it: A small list of tips to help with first (or continued) forays into alternatives. Got a tip of your own? Put them in the comments section below.