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

Hedge Funds or Chicken Nuggets? Is It Time For a Personal Stop Loss?

One of my favorite comedic routines of all time comes from fellow Alabama native Roy Wood Jr. Now a regular on The Daily Show, Wood originally did stand-up at various and sundry venues, and made his television debut on Letterman in 2008.

Known for prank calls and “you ain’t going to Mars”, Wood’s best work (in my humble opinion) was a bit he did about career day.

Unlike many of us invited to talk at Career Day, Wood eschewed the normal “if you work hard and study, dream big and believe in yourself, you can achieve anything” mantra. No, Mr. Wood instead chose the path of honesty.

“Remember career day, when a bunch of people would come lie to you?” said Wood. “I went to career day and told them the truth. Look, two or three of y’all aren’t going to make it. That’s the truth. Everybody’s not going to be rich and famous. Somebody has to make the Whoppers, and that’s what people need to understand at an early age. We need failures – they provide chicken nuggets and lap dances, and I like both of them. They are important services...But apparently that’s the wrong thing to thing to say to a room full of first graders.”

As I received news of yet another rash of hedge fund closures, Mr. Wood’s words came to mind. Not because I expect these former fund managers to start making “parts is parts” processed chicken or working in a Magic Mike tribute show, but because, at least the way the industry is evolving right now, “two or three of y’all aren’t going to make it.” 

I’ve seen managers that have struggled for years with low AUMs or extended (or even endless) pre-launch woes and many of the folks I talk to are wondering, “When is enough, enough?”

It’s hard to know when to throw in the towel in this industry. We’re always one trade, one IPO, one deal away from fame and fortune. One Thai Baht, one housing crisis, or one Facebook could make or break a professional investor. It’s a giddy proposition, and one that anyone with a Google machine knows can and does happen. 

But unfortunately, waiting for the lightning to strike, and figuring out how to capitalize on it if you’re not already a household name, can be excruciating. 

I’ve said it before, but I’ll say it again. If you’re a hedge fund manager with $100 million under management and a 1-and-20 fee structure who made 10% for investors last year, your firm generated a whopping $560,000 after expenses last year. If you gave any of your investors a fee break for founders’ shares, or if a fair amount of that capital is personal or friends and family, and fees dip closer to 1-and-15, you made 60 grand.

That’s right, I said 60-freakin’-grand. 

And that’s for making roughly 10 times what the S&P 500 generated. 

And since 50% of the industry manages less than $100 million, those firms did even worse, even if they, too, outperformed, which may make those chicken nuggets look a bit more attractive. 

So what’s an intrepid, alternative investment professional to do in a world where 90% of capital is directed to the billion-dollar club and expenses are at an all-time high? Maybe it’s time for a little soul searching.

What’s your overall financial situation? Assume perhaps 10%-20% in AUM growth going forward, along with realistic return expectations. What does the overall firm income look like? Many fund managers launch funds with healthy war chests created at other firms or from other roles, but that is seldom an endless pool of capital. What is the realistic proposition for wealth creation and preservation assuming costs continue to increase and asset growth is sluggish at best? It can be difficult to part with one’s magnum opus, and as humans we do tend to ascribe more value to things in which we have sunk costs. But take a step back and attempt to look rationally and unemotionally at your current situation and the likely scenarios for the next three years. Enlist an impartial third party to validate your assumptions and try to determine if you’re still on the right path.

Can you reinvent your business in any way to improve your AUM base or reduce expenses? There are a growing number of private equity firms dedicated to purchasing strategic stakes in asset managers, have you considered selling a part of the business? Have you investigated all of your service provider relationships to ensure you have all your bases covered, and covered most effectively? Are you being penny-wise and pound-foolish when it comes to bringing on additional resources, like marketing or operational assistance? Can you team up with a group of other managers to create a cost-sharing consortium for certain functions? Have you shopped your strategy to larger shops that may be looking to diversify their offerings? It is always critical to remember that it running an investment firm ain’t all about (managing) the money, money, money – running an investment shop requires business acumen, strategic planning and smart investments in the firm. Maybe you don’t end up being stud duck of your own Blackstone-esque entity, but you do get to keep doing what you love. 

Can you see yourself doing anything else? I know several investors who say that if you don’t want to manage money at $100 million, you don’t deserve to manage money at $1 billion, and there’s something to be said for that - at least in a perfect world. If you can think of other career avenues you might enjoy, however, it may be time to explore those options. Money managers have done that throughout the last several years, leaving to spend time with family, get involved in charity, and at least three even leaving to start food trucks (The Dark Side of the Moo, and the PIMCO croque-monsieur truck) and The Real Good Juice Company. Hell, even I contemplate buying a farm and raising organic eggs at least once a month. But at the end of the day, I still love what I do. Most days. If you get up every day excited to face the markets, win or lose. If you think your strategy still has the “it” factor. If you think doing any other job would be like enduring the “long dark tea time of the soul”, stick with it. You may never be Dan Loeb, but you’ll always be engaged and happy. 

Here’s to better luck in 2016 for everyone. Let’s hope that the industry changes in ways that make it easier for emerging managers to keep their heads above water and that my little soul searching exercise turns out to be a worst case scenario and not the status quo. If not, you can always think of a break from the investment industry like a stop loss. It's a fail safe to give you time to re-evaluate, re-adjust and come back stronger. Just look at the PIMCO food truck guy - after three years of sandwiches, he's back in the game. And he brought snacks. 

Links to sources: 

Roy Wood Jr. Career Day - https://www.youtube.com/watch?v=_mApfABF-c8

Hedge Fund Fees - The Truth and Math - http://www.aboutmjones.com/mjblog/2015/6/29/hedge-fund-truth-series-hedge-fund-fees

Hedge Fund Food Truck - http://www.cnbc.com/2015/06/10/from-finance-to-food-trucks-lessons-learned.html

PIMCO Food Truck - http://blogs.wsj.com/moneybeat/2014/10/29/the-pimco-food-truck-lives-on/

Hedge Fund Juicer - http://money.cnn.com/2014/10/06/investing/quit-wall-street-open-food-business/

“long dark tea time of the soul” is from The Hitchhikers Guide to the Galaxy

Not The Same Old Investing Lang Syne

I love New Year’s Day. It’s a tabula rasa. A wide expanse of pristine sand with no footprints. There are no victories to celebrate (except avoiding Uber surge pricing), but also no defeats. Indeed, on January 1st, my resolutions are strong and, as yet, unbroken. Optimism is high and my natural cynicism has yet to fully kick in after being lulled into complacency by sparkly fireworks and a barrel of Prosecco.

And, really, I’m great at New Year’s resolutions. I should be - I make the same damn ones every year.

1. Floss daily
2. Exercise 5 days a week
3. No carbs
4. Spend less
5. Meditate

Last year I did pretty well. I flossed daily until about June, and kept up regular meditation until early December (so close!). On the other hand, the “no carbs” promise only lasted until my pot of Hoppin’ Johns finished cooking later that day. Can’t win ‘em all, I guess.

So this year, I’m taking a different tack. I mean, seriously, even if I did accomplish my annual goals, who really likes a skinny, sober, cheapo anyway?

No, this year, I’m going with a larger, though perhaps more inspiring, resolution, which is now on an official office nameplate to encourage me daily.

This jaunty motto gives me more latitude, more maneuverability and certainly more creative license to “git ‘er done” in 2016.

And it seems to me that certain portions of the investment industry could use similar doses of encouragement.

In truth, 2015 was a tough year to be an emerging manager. Skyrocketing costs of running an alternative investment business combined with low investor demand caused widespread carnage.

For example, industry-watcher Eurekahedge estimates 294 European hedge funds shuttered in 2015, and 75% of those funds managed less than $150 million. A mere 259 European hedge funds launched in 2015, meaning the industry actually contracted during what is arguably a market environment that needs more, not less, hedging.

(As an aside, these stats make it look like AIFMD could, in fact, end up protecting investors – by accelerating the closures of the instruments they seek to regulate.  No alternative investment funds, no alternative investment fund risk, right?)

But what if there is evidence that small funds outperform, particularly during a crisis? What if soaring regulatory costs and contracting capital raising opportunities are actually going to potentially cost investors in the long run? Don’t think that’s possible? Maybe you missed the compelling study from London’s City University that showed investors were better off with small funds during a crisis (like 2000-2002 or 2008). If you did, it’s certainly worth a read: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2630749

And what about active managers? Those poor bastards can’t catch a break. Through October 2015, Morningstar reported that 58.6% of active managers had underperformed their benchmark, while over 10 years 73% had fallen short.

Undoubtedly, them ain’t good odds. But again, what if the time period and the practically historic bull market are to blame for underperformance? With the Dow providing its first annual loss since 2008, is now really the time to go “all in” with index tracking ETFs?

Even in the hedge fund world, the HFRI Fund Weighted Composite returned 0.17% for the year to date through November 2015, while the Fund of Funds Composite returned 0.24% and the FOF: Conservative and FOF: Diversified Indices returned 0.85% and 0.61%, respectively. A victory, admittedly small, for active management.

And what about diversity in investing? The top performing stock picker in 2015 wasn’t a household name. According to Bloomberg, it was Deena Friedman, manager of Fidelity Select Retailing Portfolio. She returned 19% to investors for the year, outperforming 562 of her peers and the S&P Consumer Discretionary Index (up 10.5% for the year). During a period when the S&P 500 contributed a mere 2.2% to our portfolios, should we be looking at diverse managers to help boost returns and manage volatility?

Unfortunately, 2015 appears to have led us closer to inadvertently homogenizing the entire investment industry into big funds, boys, and benchmarks when perhaps we should be considering more investment options, not less.

So why not consider something a bit different in your 2016 investing?

To be sure, I’m no great prognosticator, however it doesn’t take Nostradamus to see that the markets may be showing signs of running out of steam. Now might be a good time to consider using more of the crayons in the box before volatility has the opportunity to make us its bitch.

Emerging managers, diversity, and active management may enhance 2016 investments. And carbs. Can’t forget the carbs.

Sources: Eurekahedge, Hedge Fund Research, London’s City University “Are Investors Better Off With Small Hedge Funds In Time of Crisis”, Morningstar, Bloomberg

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 Santa...

Think there's not enough evidence to demonstrate that gender diversity can boost returns and improve diversification? Take a look at the infographic below and see if you still feel the same way...

(c) 2015 MJ Alts

Keen Delight in the Misfortune of Hedge Funds...And Me

I couldn’t face the same old Thanksgiving this year. Another tryptophan-laced orgy of food combined with marathon cleaning sessions before and after the big event, someone arriving with undisclosed food allergies, red wine on the carpet, cats eating the centerpiece and leftovers I have to look at with the dull eyes of the long married for weeks after the main event. No thank you!

So I did what any sane person would do: I went to Hawaii instead.

There, Thanksgiving was a Pina Colada-fueled homage to my ever present "SPF Burqa", sandy beaches and folks that unironically say “Brah.” I even tried surfing for the first time. And despite my deep-seated pleasure at a) not dying, b) not wiping out a la Greg Brady and the cursed tiki necklace, and c) standing up on at least one North Shore wave, I quickly learned after posting this picture that people did not necessarily share my enthusiasm or revel in my surfing accomplishments.

No, the most popular picture I posted was instead this gem, where a legion of people could see me wiping out like a boss. 

I can’t claim to be particularly unique in this regard. In fact, it seems like the whole world likes nothing better than a deep dose of what the Germans would call schadenfreude, or “pleasure derived by someone from another person’s misfortune.” My full-on, Pacific Ocean-surfing-netti-pot photo was an exhibition of this lovely phenomenon writ small, reserved for those brave enough to call me “friend” on Facebook.

For a larger scale demonstration of schadenfreude, we had only to look as far as the hedge fund headlines in the last ten days or so.  Some of my personal faves include:

“Hedge Funds Lick Wounds After Tough Year”

“Another Humbling Year For Hedge Funds”

“Hedge Funds Brace for Redemptions”

“Hedge Fund Giant Laments Profitability, Will Return $8 billion”

“Surprise! Hedge Funds Aren’t That Bad At Picking Stocks”

“The Incredible Shrinking Firms of Hedge Fund Billionaires”

Yeah, yeah, yeah…let’s all agree 2009 to present hasn’t been the easiest time to be a fan of alternative investments.

But let’s take a moment to put our keen delight in the misfortune of hedge funds into perspective.

Hedge funds aren’t exactly wiping out Greg Brady-style, either.

1)   Yes, there have been closures & return of capital from some hedge funds, including a few large enough to be household names. BlueCrest opted to return outside investor capital, transitioning to a private investment partnership due to redemptions, fee pressure and its impact on recruiting. Avenue shuttered its hedge fund in favor of longer duration investments. Blackrock closed a macro fund that was down single digits for the year. Seminole returned $400 million of investor capital to better align the trading strategy with the markets and protect profitability, after returning 16% on average for the last 20 years. None of these are the spectacular, cry-during-an-MTV-performance, Justin Beiber-style meltdown, but rather strategic decisions we expect business owners to make daily.

2)   Yes, hedge funds haven’t exactly set the world on fire with 2015 performance. Or 2014 performance. Or 2013 performance…well, you get the picture. However, we have to remember, yet again, that the comparisons we’re making are average performance. If you look at return dispersion (here from Credit Suisse) even within single strategies of hedge funds, it is easier to remember that there are funds performing much better than the “average.”

(c) Credit Suisse Asset Management

3)   Yes, hedge fund managers are losing money, but perhaps so are you. Given the explosion of institutional assets in hedge funds, celebrating the losses of a hedge fund could be tantamount to celebrating the losses of your favorite school teacher, fireman, police officer or other “main street” investor. And if that don’t take the wind out of your sails, I don’t know what will. 

However, even with these clarifications, I am perhaps a little overdue in providing some hedge fund “tough love.” So here goes:

Hedge fund managers: Fee pressure is a pain. Expenses are up, regulation is increasing, the markets are more difficult to navigate and profitability is down. It’s unlikely that many of you will be able to weather a protracted double-digit or high single digit drawdown given the economic realities of managing a fund today and you’re less likely to be given the benefit of any doubt now than at perhaps any other time in hedge fund history.

But what protects fee structures and prevents increased regulation? Generating returns for your investors and doing the right things (disclosures, filings, investor relations, any and all regulatory filings) and doing it in a way that lets you sleep at night. This could be a watershed moment for hedged asset management. I wish I had a magic wand that would make it all easier but instead I can only say, for the love of all that’s holy, get ‘er done.

Babelfish for Hedge Funds

Writing headlines is hard. 

Coming up with something appropriately attention grabbing without veering off into purple prose is a serious skill. I, myself, occasionally have moments of headline genius, but often times wind up more in the land of "huh?" 

And I know it's not just me. After all, the Washington Post just gave us this headline gem last week.

Best. Headline. Ever.

But really, the world of hedge funds deserves their own set of headline awards. The headlines about the hedge fund industry are often incendiary, divisive and generally geared to just stir stuff up. 

In order to help casual readers of hedge fund press wade through the copious and inflammatory rhetoric, I've created a handy-dandy hedge fund babel fish for y'all below. 

May this little translation tool reduce your drama factor exponentially this Thanksgiving, even if you use it while hiding away from kids/in-laws/friends/siblings/spouses or dishwashing duties.

Hedge Fund BabelFish

(c) MJ Alts

Happy Thanksgiving to those that celebrate it, and may everyone find something this week for which to be grateful, whether there's tryptophan involved or not. 

(Not So) Fast Times at Hedge Fund High

Those of you that have heard me speak on more than one occasion have probably heard me utter the phrase "Investing in emerging managers is like sex in high school. Lots of talk, very little action." In full disclosure, Jim Dunn of Verger was the first to utter those words, but they are so apropos that I have sense borrowed them for myself once or twice. (Thanks Jim!)

This week, I had the opportunity to informally poll investors and emerging managers, this time in the form of women-run funds, and that wonderful turn of phrase proved apt once again. In fact, I could almost hear Mike Damone saying "I can see it all now, this is gonna be just like last summer. You fell in love with that girl at the Fotomat, you bought forty dollars worth of [freakin'] film, and you never even talked to her. You don't even own a camera."

Indeed, it does seem as if investors often spend a lot of time stalking the camera store, but never getting the picture. So I decided to ask the audience of managers and investors at last weeks 100 Women in Hedge Funds Senior Practitioner Workshop where we stand and what could help the situation. Here's what I learned.

1) Some women-run funds may be getting lucky, but action is still sparse. 

(c) 2015 MJ Alts

2) Managers feel that a number of things impede their ability to raise capital, but investors are focused primarily on only two issues: supply and size. 

(c) 2015 MJ Alts

(c) 2015 MJ Alts

3) And the answer to what would make investing in women-run funds easier? Three words: Binders of Women. Just kidding, but better data sources for women-run funds, better consultant buy-in and the mysterious answer "other" all ranked pretty high. Some of the suggestions for "other" included more seed capital to help overcome AUM objections and more networking with managers you don't already know. 

(c) 2015 MJ Alts

And, while these responses were specifically geared towards women owned and women run funds, in my conversations with investors, the issues are not entirely dissimilar for minority owned and run funds, or really any other emerging manager. 

So, ladies and gentlemen, let's work the problem and see if there aren't good solutions to these issues. It will be healthy for me to have to come up with a new, creative and vaguely offensive way to describe the industry. 

And please take a moment to support 100 Women in Hedge Funds as they are part of the solution and the reason I could run this quirky poll in the first place!

Hedge Funds' "Bad Reputation"

I had yet another wedding to attend this weekend: My third in four weeks. I may never get all this rice out of my hair. Seriously.

But as I was driving to this happy event, a few questions rolled through my mind:

Was I dressed appropriately? (Not really.)

Was I going to make it before the bride actually walked down the aisle? (Just barely.)

Would there be a reprise of my “Footloose Dance” humiliation during the reception? (Thankfully, no.)

And then a strange thing happened. As I cruised onto the Ashland City Highway, a familiar tune pulsed from my speakers.

“An' I don't give a damn 'bout my reputation

The world's in trouble, there's no communication

An' everyone can say what they wanna say

It never gets better, anyway

So why should I care about a bad reputation anyway?

Oh no, not me, oh no, not me”

Yes – Saint Joan Jett had arrived to calm my nerves before I rushed into the small rural church, just in time for the wedding. To say I rocked those last five minutes of the drive would be an understatement.

When I awoke on Sunday morning, I was faced with a somewhat similar scenario. Hedge funds were skewered yet again; this time in an article by the New York Times referencing a study of eleven pension funds entitled “All That Glitters Is Not Gold.”  

The study demonstrated that hedge funds had added little value to public pension funds (in many cases underperforming the fund as a whole) and cost an exorbitant amount, based on the authors’ arbitrary 1.8% and 18% fee structure.  

The report concludes: “Although hedge fund managers have convinced many investors that they provide investment products so uniquely profitable that extraordinarily high fees are warranted, our research suggests that there is little evidence to back up these claims.”

Oh joy. Seems I’m not the only one that needs to be concerned with my reputation.

But, upon further study of the report, I noted a couple of interesting points that are, I think, at least worthy of consideration.

Time Periods Matter: Of the eleven pension funds reviewed for the study, nearly half included only the bull market period that started in 2009. There was no period longer than 13 fiscal years in the study (about the time the first pension funds dove into the hedge fund waters), and actually only one of those. For the pension plans that did include the 2008/09 fiscal year, in every case, based on visual interpretation of the line graphs, the hedge fund portfolios outperformed. So it would appear that, given the appropriate market environment, hedge funds can and do perform. So should we draw concrete performance conclusions on hedge funds’ performance during what has been a raging bull market? As we all know, if a fund is truly “hedged” it is nigh on impossible for that fund to outperform a market with its foot on the gas.

Manager Selection Matters: As investors, we make choices about our investments. Our choices are informed by the amount of money we have (or don’t have) to invest. They are informed by investment bylaws and state regulations. They are informed by the universe of investment options of which we are aware. They are informed by the amount of time we have to devote to our investment research. They are informed by our behavioral biases and those of other key decision makers. In other words, fund selection isn’t straightforward. Think about how hard it is to order a great entrée in a restaurant – and now picture that entrée costing thousands or millions of dollars. Get my drift? 

No matter how you look at it, each investor has some responsibility for their fund selection.  What’s interesting about this study is, again, based on eyeballing the line graphs, it looks like the plans reviewed generated hedge fund returns of about 8.3% in FY 2014. If you look at the NACUBO/Commonfund review of 832 endowments, in contrast, you see that they averaged a 9.9% return from “marketable alternative strategies.” Now, granted there could be a difference in terminology, or there could be something there. After all, I always say in investing, Your Mileage May Vary, and manager selection is a huge part of that. Even among the eleven managers in the "Glitters" study, there is a large variance in overall portfolio and hedge fund performance. 

So maybe the problem isn’t the investment vehicle. Maybe there is something that public pensions and others that are disappointed with their hedge fund earnings could learn or adapt from public endowments' approach to hedge fund investing. After all, endowments entered the hedge fund fray a bit before their public pension brethren. And, now this is just a thought, but looking at the largest endowments in the NACUBO study, they’re kind of kicking ass when it comes to hedge funds. Their marketable alternatives strategies returned 11.4% in FY’14, well above hedge fund industry averages and well above what others may be experiencing. What’s the what here? Should we be looking to those investors to figure out what ingredient we may be missing from our own secret sauce? It's not that the pensions included didn't do an admirable job of building portfolios, as each beat the overage hedge fund average, but is there something that could be done (structurally, in manager selection or otherwise) to boost returns?  

Fees, Fees, Fees: As I mentioned, the study uses an arbitrary 1.8% and 18% fee structure, even though we know that industry average is closer to 1.5% and 17%, but let’s even leave that aside for a moment. We really have no way of knowing what these pensions paid in fees unless it is publicly disclosed. If they went into a separate account, for example, they may have a totally different fee structure. If they negotiated a lower fee, that’s also difficult to know. In many cases, public pension “big dogs” are able to achieve fee concessions that us mere mortals cannot hope to get.

Does this mean I think there’s no wiggle room for hedge fund fees? Absolutely not. Those of you that are regular readers know that I generally support sliding scales for management fees in particular, based on the manager’s total AUM. But even then, it’s not a straightforward “Off with their fees!” equation. Some strategies are more labor intensive than others, which may require higher fees. Newer and smaller funds have very little room between profitability and problems in their fee structures. As in most things hedge fund related, there is not one-size-fits-all fee solution. Investors should advocate for themselves within reason, and managers should protect their ability to attract talent, execute strategy and generate returns for all their investors. It’s all about balance. 

It’s perhaps wise, then, to take a step back and think about whether we have enough data to draw actionable conclusions and, perhaps more importantly, if there is a way to improve hedge funds relationship and return contribution to public pensions. Anything else would be discarding the baby with the bathwater, based on what looks like a bad reputation.

Founding Funders?

Less than one score and seven years ago, it was relatively easy for hedge funds and other private fund vehicles to gain early stage capital. They went to their networks of high net worth individuals, let a little word of mouth work its magic, and then waited for early investments to roll in. Due diligence was minimal, who you knew was paramount and a rising tide (the Bull Market) lifted all ships. If it hadn’t been for the shoulder pads, it might have been the golden age of hedge funds.

Now, of course, raising early stage capital is a whole different ballgame. From seeders to bootstrapping to joint ventures to Founders’ Share classes, there are a host of options available to emerging managers who want assets, although frankly most work better in theory than they do in practice.

Lately, most of the buzz has surrounded Founders’ Share capital. And for managers that are unable to secure bulk early stage financing from a seeder, founders’ shares may hold some appeal.

Founders’ shares generally reduce management fees by up to 50 basis points, while incentive fees may be reduced by up to 5 percent. Founders’ shares are generally offered for a limited time for only early mover investors and are discontinued when a specific asset level or time threshold is passed. Founders’ Shares, and their reduced fees, remain in effect as long as the investor maintains an allocation to the fund.

Founders’ Shares have a lot of perceived benefits, including:

• Founders’ Shares sound cool. Seriously. Investors feel more like they’ve build something, and that can be appealing to some.
• They create urgency. Because Founders’ Shares are only offered until a certain AUM threshold is reached, or for a certain period of time, theoretically this “limited time offer” should encourage investors to pull the allocation trigger. Hey, it works for Ronco...
• They entice fee-wary investors without sacrificing the entire fee structure of the fund.

However, just because they sound good in theory doesn’t mean they are a panacea for every fund.

• Managers should consider the capacity of the fund. If the capacity is low, the amount allowed in founders’ share classes must be balanced to prevent a general loss of profitability for the fund.
• Institutional investors who insist on a “most favored nation” clause may be eligible to receive the reduced fee structure. As a result, it is important to discuss any legal ramifications of founders’ shares with counsel.
• Marketing materials must be created that clearly outline the opportunity for early investors. These materials (as well as any databases to which you’ve reported fees) must be updated when the initial “founding period” is over.

Perhaps most importantly, it’s important to remember that sacrificing fee revenue is most dangerous when assets under management are low. Once a firm or fund has attracted $1 billion in AUM, even a 1% management fee will generate $10 million in fee revenues in a flat year. For a $100 million fund, that fee revenue falls to $2 million in a 2% and 20% scenario, and $1 million in a 1% and 20% scenario (assuming flat performance).

And of course, those numbers are BEFORE expenses. Citibank estimates that a typical $100 million hedge fund must spend $2,440,000 each year to keep the fund running. Factoring that into the equation, it’s easy to see how quickly a fund can go from hero to zero, particularly if performance doesn’t pan out.

(c) 2015 MJ Alts

So I said all that to say this. Founders’ Shares can be a great thing if used judiciously, but please do the math to determine how much of a great thing you can stand to offer.

Are You The Next Blackstone? Don’t Count On It.

During an unbelievable number of meetings with investors and managers, I hear the same two refrains:

“We’re looking for the next Blackstone.”

Or

“We think we’re the next Blackstone.”

It’s enough to make you wonder if such success is commonplace or if we’re all overreaching just a teeny bit.

Well, I’ve shaken my Magic Eight Ball and the answer is this, at least for newer funds: “Outlook Not So Good.”

Recently, on a boring Sunday afternoon, I decided to go through Institutional Investor’s list of the 100 largest hedge funds and figure out when each fund company launched.

Yes, clearly I need more hobbies.

But the results (as well as my lack of social life) were pretty shocking. There are no funds within the top 100 that launched during the last 5 years. There are only 4 funds in the top 100 that launched within the last 10 years. In fact, nearly 70% of the top 100 hedge fund firms launched before the first iPod.

Obviously, this begs a question: Where are all the new Blackstones?

(c) 2015 MJ Alts

Whatever complaints can be lobbed at hedge funds, I do find it hard to believe that the talent pool has deteriorated to such a degree that there just isn’t a supply of skilled fund managers available. On the other hand, I do have a few theories on what forces may be at work.

1. Change In Investor Dynamics: For a long time, hedge funds were the investment hunting ground of high net worth individuals and family offices. In fact, pre-1998 saw little to no meaningful investment of institutional capital into hedge funds, and investment activity into hedge funds didn’t accelerate markedly until after the Tech Wreck. But by 2011, 61% of all capital in hedge funds was institutional capital. But why should this matter? Imagine you’re an institutional investor with $1 billion or more to invest into hedge funds. Imagine you have a board. Imagine you have headline risk. Imagine you are hit on by every fund marketer known to man if you go to a conference. Imagine you have policies that dictate the percent of assets under management that your allocation can represent. Now, try to put that capital to work in a reasonable number of high-performing hedge funds. It seems reasonable to assume that the investing constraints of being a large institutional investor would drive allocations towards larger funds with longer track records. Just like you never get fired for buying IBM, it’s unlikely you’ll be canned for investing with Blackstone, AQR, Credit Suisse or other big name fund complexes.
2. Market Timing: According to HFR, assets in hedge funds grew from $490.6billion in 2000 to nearly $1.9 trillion in 2007, or more than 287%. One of the reasons for this surge in assets is, I believe, prevailing market conditions. Having just exited one of the greatest bull markets in history and entered two of only four 10-year losing streaks in the history of the S&P 500, hedge funds had an opportunity to well, hedge, and as a result, outperform the markets. Unlike the last 6-ish years (recent months notwithstanding), where hedge funds have been heavily criticized for “underperforming” during an almost unchecked market run-up, market conditions were more favorable to hedged strategies between 2000 and 2008. This allowed managers with already established track records and AUM to capitalize on market and investor demographic trends and secure their dominant status going forward.
3. Evolving Fund Management Landscape: Let’s face it – the financial world was a kinder and gentler place before 2008. Ok, that’s total BS, but it was less regulated. Hedge funds were not required to register with the SEC, file Form PF, hire compliance officers, have compliance manuals, comply with AIFMD, FATCA and a host of other regulatory burdens. As a result, firms formed prior to 2005 did perhaps have an overhead advantage over their newer brethren. Funds today don’t break even until they raise between $250 and $350 million in AUM, and barriers to entry have certainly grown. Add to this that more than 90% of capital has gone to funds with $1billion+ under management post-2008 and a manager would practically have to have perfectly aligned stars, impeccable performance and perhaps have made some sort of live sacrifice to achieve basic hedge fund dominance, let alone titan status.

This is not to say that newer funds haven’t made it into the “Billion Dollar Club” or that rarified air of 500 or so hedge funds that manage the bulk of investor assets. It is, however, a stark look at how we define expectations and success on both the investor and manager side of the equation. If 40 is the new 30 and orange is the new black, is $500 million or $1 billion in AUM the new yardstick for hedge funds? Time will tell, but I’m wondering if the Magic 8-Ball isn’t on to something. 

Investment Wisdom May Increase With Age, Dance Skills Don't

As I prepare to move from one demographic checkbox to another later this week, I’ve been spending a fair amount of time wandering down memory lane. I’ve re-watched the movies from my youth, including Sixteen Candles, Ferris Bueller’s Day Off, Caddyshack and Smokey & The Bandit. I’ve gotten in touch with my inner Carlton Banks during a stirring, post-wedding live band rendition of “Footloose.” And I’m pretty sure when Loggins sang “everybody cut, everybody cut, everybody cut Footloose!” he wasn’t talking to me.

Property of Fresh Prince of Bel Air.

I’ve also spent a lot of time thinking about all the things I know now and all the stuff I have yet to learn. 

For my 45th year, I plan to keep learning as much as possible. I’m going to surf camp for a week. I will finally learn how to do a proper figure skating sit spin. I vow to discover how to drive with more limited use of my middle finger. And of course, I hope to continue to figure out how to be a better investor, researcher and snarky advocate for the alternative investment industry. 

When reflecting on what I do know I know, however, I did come up with some truths that constantly guide my investment decisions and unsolicited advice. They’ve become the North Star of my investment world, so to speak. And as luck would have it, there’s exactly one for each decade, with one to grow on. How fitting!

One: Continuous outperformance is a myth. Every manager screws up, gets caught with their portfolio pants down, or otherwise loses money from time to time. Finding the managers that minimize those downturns, can admit to and learn from mistakes, doesn’t keep making the same mistakes and, perhaps most importantly, live to invest another day is the real trick. Frankly, the only managers I’ve ever seen that never posted losses were frauds or, um, otherwise a bit creative in how they marked their portfolios. 

Two: Between investing early and late, I’ll take early any day. In 2006, I started researching the outperformance of emerging managers. In 2010, I started researching women and minority run funds. Thus far, investors have largely ignored those groups in favor of the same old, same old. As an investor friend of mine once quipped: “Investing in emerging managers is like sex in high school, even though everyone talks about it, no one actually does it.” Despite the lack of investors putting their money where my mouth is, I remain convinced there’s significant alpha to be had with these groups. The lesson? Just because the packaging doesn’t look familiar doesn’t mean there’s not goodies inside. The same thing goes for new trends for venture capitalists, out-of-favor investments, sectors or strategies. Early bird, meet worm.

Three: Any way you can invest involves risk. Whether you keep money in a checking account, invest in hedge funds, index funds, actively, passively, in real assets, conservatively or aggressively, there is a risk you will lose money or not make enough money, or that you will not have access to your money or otherwise lose out. My Grannie kept money stuffed in the pockets of the clothes in her closet because she thought that was risk free, but she missed out on any potential profits and, obviously, her returns lagged inflation. Not to mention: what if the house burned down? There are no risk-free investments. Period.

Four: Investment professionals (and anyone else) that truly want to rip you off will find a way to do so. Having said that, the best way for them to accomplish that is to build blind trust. After all, the “con” in con artist is short for confidence. Most of the big scams in investing couldn’t happen without trust, and most of the time those closest to the bad actor are the first to get victimized. Think Bernie Madoff who bilked members of his religious community and other friends and family. Obviously, you need to trust your investment professionals by all means or you’ll never sleep at night, but never forget to at least periodically verify.

And one to grow on: Look out for zebras, but don’t forget about the horses. A recent venture capital fraud case involved not a sophisticated cyber fraud or complex skimming techniques. The perpetrator merely added a “1” to a check, changing $8 million to $18 million. Occam wasn’t wrong: It’s not always the most sophisticated schemes or black swans that cause losses. Sometimes the ordinary can be just as dangerous. 

What’s the biggest lesson you’ve learned in your investing career? Feel free to sound off in the comments below with your best advice. And please follow me on Twitter (@MJ_Meredith_J) if you prefer your snark in 140 characters or less.

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.

Doing Well, Doing Good & Improving Investment Diversity

I learned two important lessons from writing my book: Women of The Street: Why Female Money Managers Generate Higher Returns (And How You Can Too).

1. You can make hundreds of dollars writing a book, and,
2. Writing a book makes you (at least) temporarily insane.

At the height of my book-induced anxiety, I decided to try an experiment. I decided that I would stop focusing on typos, PR, and what people would think of my research and that I would instead focus on other people. Hopefully, by doing good deeds for others I could do good and do well at the same time.

I kept a running list of my daily good deeds. I bought a massage gift certificate for my hair stylist (if you had to mess with my hair, you’d deserve one, too). I took a milkshake to a friend in the hospital. I bought Starbucks for 3 strangers behind me in line. I chased a neighbor’s loose dog down the street and brought it back to its fenced-in yard. I worked with charities and stray animals. I donated to good causes and I gave folks home-grown tomatoes (as every good southerner should do).

And guess what? At the end of the day, I knew I had made a difference. And I felt better. The folks around me felt better and, although the impact was, I’m sure, small, it was something.

Because of the research that I’ve done around diversity and investing, I often get asked how we can increase the number of women (and minorities) in the investment ranks, and I’ve spent a lot of time pondering the solution.

As I was reflecting recently on my own mission to create positive change, I realized that the answer to the diversity conundrum may not be that dissimilar.  Perhaps we can effect change with a basic concept that we’re all extremely familiar with. Let’s Compound Diversity.

We all know how critical mentoring is to success in this industry. There isn’t a single interview in my book that doesn’t at least mention the presence of at one significant (male or female) mentor. But we also know that mentoring is a time consuming task. And that often, the process starts too late, after the diversity funnel has already begun to narrow.

So instead, let’s focus on what I like to call “Mentoring Moments.” These are opportunities for you to help a women advance that don’t require a year-long (or life long) commitment, but which still can have an enormous amount of impact within your firm and across the industry.

(c) 2015 MJ Alts

What is a mentoring moment you may ask?

It’s when you can include a junior woman in on a sales pitch, due diligence, or board meeting they might otherwise not be invited to.

It’s when you email a job description to your network to help ensure that at least one woman has a seat at the interview table.

It’s getting an extra pass to a conference and giving it to a junior colleague who might not otherwise be selected to go.

It's ensuring that diverse firms have a seat at the table when competing for investment mandates, and awarding that mandate if that firm is the best fit. 

It’s when you send a firm-wide email about someone’s great work that might otherwise go unnoticed or unsung.

In short, it’s the million little ways you can help advance women and minorities in finance and build diversity in the industry.

But mentoring moments don’t end at work – they can and should happen outside of the office as well so that we increase the number of girls and women that are potentially interested in finance and investment to begin with.

In a prior blog, I discussed how girls are less likely to get an allowance than boys and that girls are less likely to be paid for chores than boys.

I showed statistics that pay disparity starts early, with girls making less for the same chores. Boys even make more for babysitting, despite the fact that 97% of all babysitters are female.

Girls also report that they are less likely than boys to be talked to about how to finance college or budgeting or other money matters.

So start your mentoring moments early. With allowances, and discussions about what you do at work and college funding and career progression. My mom made me do little pop quizzes in math (Quick! Convert that mile marker to kilometers!) when I was a girl to ensure I was never intimidated by numbers.

Picture this: A fellow panelist at the CFA Women’s Conference in San Antonio caught her daughter and her friend playing dress up and asked what they were getting ready for. Her daughter’s answer? “We’re going to a board meeting.”

Amen.

It’s our job to help future financial professionals that may not look like the ones you normally see on CNBC know that investing is cool, and that because you’re helping other people achieve their financial goals, can be also looked at as doing well while doing good.  

And if everyone (male and female!) who reads this blog commits to just five mentoring moments over the course of the next year, think of the difference we can begin to make. Your five mentoring moments will compound, and 200 mentoring moments, and, with luck, those moments will continue to compound as those women and girls embark on their own mentoring moments. And thus, the Compound Diversity movement takes hold.

We can make a difference. One moment at a time.

If you’re willing to take the challenge I’ll even make it easy for you. Here’s a form you can print and fill in as you accomplish your five mentoring moments. First one that fills it in and sends me a copy gets a copy of my book and a bottle of small batch, super tasty Southern bourbon, on me. 

(c) 2015 MJ Alts