The Seven Deadly Conference Sins

We've all been there. 

Moving, shaking, getting stuff done at an industry event. 

Hitting up investors for contact details and meetings. Meeting fund managers who can potentially add value to an investment portfolio. Looking for new business prospects among investors and managers. 

And then it happens. Knowingly or not, we commit one of the Seven Deadly Sins of Conference Attendance. 

Duh duh DUUUUHHHH!

There is perhaps no better way to curtail your most earnest conference efforts than to commit one of the following breaches of event etiquette:

The First Deadly Sin: Chasing Investors Like It's A Zombie Apocalypse

(c) Resident Evil

We all know the shark-to-seal ratio at most investment industry events isn't exactly even. As a result, the investors in the room tend to get a lot of attention. You can see them at cocktail parties, during coffee breaks, or just walking across a room with a trail of hungry investment managers and investor relations folks in their wake. Once, at a GAIM conference in Monaco, they gave out actual proximity detectors to participants. It was like watching the movie Aliens, with investors playing the role of Ripley.

I know every manager that spends money on a conference is hoping to get maximum time with investors, but please, slow your zombie roll. Don't mob investors, and try to keep your interactions to a bare minimum to keep the flow going. You're not going to sell anyone on your fund over a granola bar in a hotel hallway. Keep it simple. Your name. "I'd like to introduce you to my very interesting fund when you have a moment - can I get your card?" Move On. And if an investor is obviously trying to get somewhere (to the coffee, to the can, to a meeting) give them a little breathing room. They'll actually think better of you for it.

The Second Deadly Sin: Hiding From Managers

(c) Mean Girls

Probably as a result of the first deadly sin, some investors have taken to disappearing during networking opportunities (breaks, cocktails and lunches), in the hopes of grabbing a little peace and quiet and piece of mind. As tempting as this may be, it can be beneficial to resist the desire to escape the maddening crowd. I'm assuming that investors go to conferences to find great investing opportunities. Eating lunch in a bathroom stall (ok, your hotel room) probably isn't the best way to find them. 

The Third Deadly Sin: Cutting In Line

(c) Family Guy

A panel of investors has just finished up. You really want to talk to one (or more) of the presenters. A line of eager fund managers and conference participants has formed as the panel exits the podium. You wait patiently while they smile, shake hands and give cards to those in front of you. Then, out of nowhere, someone comes up, jumps the line and starts chatting up the investor. Worse yet, the next session starts and everyone has to move to retake their seats, leaving dreams of making contact with those investors unfulfilled. NOOOOOOO! So you. Yes you line-jumping fund manager (or marketer). Don't. The investor knows you did it (even if they can't always stop you). The managers who were patiently waiting know you did it (and are silently fuming). And you just look kind of like a tool. Just say no to line jumping. 

The Fourth Deadly Sin: The Nameless Text

(c) Tropic Thunder

You managed to score an investor's card at a cocktail party, lunch or during a break. "What the hell," you think. "I'll send them a text to see if they have time to meet for breakfast or coffee in the morning." So you send a text: "Great meeting you last night. Grab a bite tomorrow am?" The only problem? The investor has NO FREAKING IDEA who you are. For all they know, this message could be a misdial from someone else's beer-goggled evening.

It's never a great idea to text investors anyway, unless you have an imminent meeting or they've given you express permission, but texting without identifying yourself and assuming that the investor will remember you out of throngs of fund managers is just silly. Include your name and the fund name. Or better yet, send an email. 

The Fifth Deadly Sin: The Drive By

(c) The Dukes of Hazzard

Similar to the hiding from managers, the drive by occurs when investors, usually those scheduled to speak, attend an event only for their session. Fund managers, lured to pay event fees in part by the hugely cool and monied speaking faculty, get gypped out of their hard-earned dollars and investors get cheated out of finding good investment ideas for their portfolio. A true lose-lose.  

The Sixth Deadly Sin: The Close Talker/Cornering Folks

(c) Seinfeld

Conferences are crowded. Conferences are loud. Investors are scarce. One-on-one time is at a premium. That's still no excuse from getting all up in someone's personal space. I have literally been backed into a corner at an event before and, let me tell you, I was not amused. I also once attended a conference after just getting Invisalign. I wasn't entirely used to the Invisalign trays yet, and had just hurriedly scarfed a mint when I was corralled by a fund marketer. Before I knew it, the mint flew out of my mouth and landed on the marketer's arm. I tried to be cool - I picked the mint off of him, said "um, I think this may be mine," and slunk off. But seriously, if you're so close that an Arthur Bell promotional mini-mint with lisp velocity and zero aerodynamics can hit you with enough force to stick to your skin, you are too damn close. An arm's length for distance is a good rule of thumb here. 

The Seventh Deadly Sin: No Business Cards

(c) American Psycho

This one can be a bit tricky as both investors and fund managers are at times guilty. Generally speaking, investors eschew business cards to avoid a post-conference email zombie apocalypse, while fund managers and marketers either don't bring them to (Machiavellian interpretation) force investors into giving their cards up, or because (poor planning interpretation) they underestimate how many cards they will need. 

Dear All: Conferences are networking events at heart. Bring cards and enough of them. That is all.

So there you have it.

Before you hit up your next Hedge Fund, Private Equity, Venture Capital, Institutional Investor or other industry event, make sure you are up-to-date on conference etiquette, or risk being judged in attendee purgatory.  

Getting Jiggy With It

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Running On Empty

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

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

Ahhhh.....

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

(c) MJ Alts

BINGO!

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

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

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

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

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

(c) 2017 MJ Alts

(C) 2017 MJ Alts

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

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

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

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

We kids thought that was super funny. 

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

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

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

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

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

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

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

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

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

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

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

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

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

Sources:

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

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

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

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

Photo credit:

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

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

Killer Kittens & The Decline of Hedge Fund Returns

In September of this year, a curious story started making the rounds on my Facebook feed. It seems that the CDC had underestimated the rate of cat scratch disease among the general population, determining that it was both more common and perhaps more severe than previously thought.

Folks in my feed freaked. The EFF. Out.

It can’t be! Little Fluffy how could you?!?

People on Facebook (and some media outlets) actually started asking questions like:

“Are you still willing to own a cat??”

“What about kittens? You can’t get a kitten now! They are even more prone to spreading the disease!”

“What if you have kids? Children 5-9 are most susceptible!” 

Folks took special care to ensure the story hit my feed. As a crazy cat lady, they wanted me to both forewarned and forearmed.

And my reaction? After I got done singing “They give me Cat. Scratch. FEVER!” in my best Ted Nugent-esque voice, I laughed my cat-fur dusted butt off.

I’m guessing no one really made it past the headline of the article to see that the actual chance in contracting cat scratch disease was 5 in 100,000. That’s right, you have a better chance of injuring yourself in a “toilet related incident” (1 in 10,000) than you do of contracting cat scratch FEVER. Buckets and pails injured 11,000 people in 1996 (about the same number of folks that get cat scratch FEVER annually). Hell, air fresheners caused 2,600 injuries one year.

Y’all have seen the Darwin Awards - you know just about anything can be dangerous in the wrong hands.

But no, because people are well on their way to black belt status when it comes to specious claims and spurious correlations, somehow deadly kittens were news.

I had almost the same reaction (minus the Ted Nugent rocker style) two weeks ago when I came across the Bloomberg article “Hedge Fund Woes After U.S. Crackdown Don’t Surprise SEC’s Chair.” In it, the author notes that hedge fund returns have “fallen off a cliff “ since regulators and prosecutors cracked down on insider trading. Mary Jo White was quoted as saying “I don’t think anyone would argue that some of those returns at some hedge funds, and I don’t want to paint with too broad a brush, can be attributable to obviously trading on insider information that one is not allowed to trade on.”

The article then goes on to compare HFRI Equity Hedge returns to the S&P 500 November 2002-September 2009 and November 2009 to September 2016. Not sure what happened to October 2009, but whatevs.

Oh my. Where to even start?

I suppose the start of the SEC insider-trading crackdown could be traced to the charges filed against Raj Rajaratnam of Galleon in October 2009, which would account for the rather odd time period selection in the article.

However, information on insider trading enforcement actions seems to indicate that the number of actions was largely stable until 2015, hovering right around an average of 51, until a spike to 87 enforcement actions occurred in 2015. 

(c) 2016 MJ Alts. Data from www.sec.gov. 

I suppose you could say that high-profile hedge fund enforcement actions from 2009 on acted as a deterrent industry-wide. One could argue that fear of insider trading actually curtailed insider trading. All the compliance training, videos, quarterly disclosures, CCO reviews and whatnot that were instigated in the wake of SEC activities kept hedge fund managers too honest to continue their pernicious investment activities post-Raj's 2009 arrest.

Although, to be fair, compliance is generally designed to catch honest people. Money managers' who genuinely want to rip you off? They'll find a way to do so, compliance or not.

But regardless, I might argue that any crackdown that has occurred happened not in 2009, but in 2015 (a 70% increase in insider trading enforcement actions from the prior 10-year average is definitely notable), when, let’s remember, the S&P 500 lost 0.7% (without dividends reinvested) or gained a whopping 1.2% (with dividends reinvested), depending on your point of view. During the same period, the HFRI Fund Weighted Composite lost 0.85% (net), which makes performance during the actual crackdown time period a virtual tie, no?

Furthermore, HFR reported that 55% of funds posted gains that year. So maybe up to 5,500 funds were still engaging in insider trading, despite the crackdown and widespread compliance terror? Oh, and the funds listed in this Bloomberg article (http://www.bloomberg.com/news/articles/2016-02-23/the-top-performing-hedge-funds-of-2015), well I guess they were all tripping with the tipsters, too?

That’s a LOT of alleged (implied?) insider trading, my friends. A lot more than the actual 87 insider trading enforcement actions that took place that year. I guess all 87 of those enforcement actions must have been hedge funds, right?

Yeah, no.

According to an SEC publication on 2015 activities, “notable” examples of insider trading were listed as follows:

• An entrepreneur, a private equity investor and a venture capital general partner (walk into a bar?) investing in Cooper Tire;
• A former Fortune 500 exec and his brother-in-law;
• A former day trader, two of his friends and his brother-in-law (note to self, don’t talk freely in front of married-in family); and
• A Swiss trader

Were some hedge funds personnel charged with insider trading that year? I’m sure there were – there are some hedge fund personnel charged virtually every year. However, the fact is that the folks that get socked with insider trading come from all walks of financial and non-financial life. And even if EVERY case in FY2015 was a hedgie – it would still comprise less than 0.01% of the overall industry.

That’s right, a toilet injury is STILL more likely than hedge fund insider trading resulting in an enforcement action.

So if I’ve said it once, I’ve said it 1,000 times, but clearly it still bears repeating.

First, average not all hedge fund returns have lagged the S&P 500 in recent years. Some funds have done worse, some funds have performed well, and some have generated genuinely strong returns. Second, time periods matter. Third, the S&P 500 has been in a near-historic run-up and IS NOT HEDGED so it has no performance drag. Fourth, allegations of insider trading and hedge funds tend to be grossly exaggerated. And finally fifth – you’re pretty unlikely to get cat scratch FEVER from a sweet kitten – so visit your local shelter today.

Sources:

http://www.shape.com/lifestyle/mind-and-body/cat-scratch-disease-risk-prevention

http://www.care2.com/causes/youre-more-likely-to-be-injured-by-a-toilet-than-a-shark.html

http://factspy.net/40000-toilet-related-injuries-in-the-us-every-year/

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

www.sec.gov

https://www.hedgefundresearch.com/hfri-indices-december-2015-performance-notes

https://www.sec.gov/about/secpar/secafr2015.pdf

Sleepless in Nashville

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

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

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

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

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

To sleep, no chance to dream

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

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

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

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

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

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

In no particular order:

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

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

Sources and Bonus Reading: 

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

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

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

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

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

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

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

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

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

Seed Me, Seymour!

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

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

(c) 2016 MJ Alts

Can This (Hedge Fund) Relationship Be Saved?

Dear MJ:

About 10 years ago, I became involved with a very special investment. I had my eye on it for a while, you see, and had noticed things about this investment that really appealed to me. It was different than the other investments I had known, less restricted, and, dare I say it, maybe even a little uninhibited. But it seemed to always be there for people when the markets were down, and that really turned me on.

I started looking into getting involved with this investment and, based on what I was able to research, learned that others had a generally good, though occasionally volatile, relationship with investments similar to mine. I saw how happy those family offices and high net worth individuals were over the long term. I watched their investments support them through the tech wreck, and I wanted a that special relationship, too.

But as much as my heart screamed “invest!” my head, and the heads of those around me urged caution. So I gave in, but not without a few stipulations. The investment would have to change, you see. Not the things I loved – no, I wanted the long-term happiness and the unwavering support. But I didn’t want our relationship to be volatile. And the freedom, well, that made me a little nervous, too. And I really wanted my friends to like my investment, too. So I asked it to clean itself up, move into better digs, and I insisted it hire people to ensure it didn’t step out of line. I even hired people to monitor it, too. And several people close to the investment? Well, they promised it would never hurt me.

Now, 10 years later, our relationship has changed. My investment doesn’t make me as happy as it should. It’s like it’s not even trying.  Some of my friends have become disillusioned with my investment, and a few are even pressuring me to dump it. They argue that I pay for everything and am not getting much out of it in return.

So, Dear MJ, what’s an investor to do?

Signed,

Hedged Up

My Dear “Hedged Up”:

I’ll be honest: I’ve received quite a few letters like yours lately. Egged on by a strong market, vociferous press coverage and contentious board meetings, there’s a lot of fed up investors all over the world right now wondering how we got here. I’m not entirely sure I have the answers, but as an investment voyeur for more than 18 years, I can definitively say that the investment you fell in love with? Well, it’s changed.

In the late 90s up through most of the tech wreck, I was working at Van Hedge Fund Advisors, which some of you may remember as one of the first consultants that worked with investments like yours. At that time, our proprietary database tracked just under 5,000 funds. Some were good. Some were bad. Some ended up being frauds. At least one, Long Term Capital Management (“LTCM”), blew up spectacularly during my first six months on the job.  

Our clients were primarily high net worth individuals and small family offices. We worked with some endowments and wealth management firms, but, in general, the client base was not institutional. In fact, per Citibank, only $125 billion of hedge fund assets under management (or roughly 20%) were institutional prior to 2002.

Returns prior to LTCM were reported by fund managers to Van Hedge primarily quarterly, changing to monthly starting in 1999. By 2000, all of our funds were reporting at least monthly. After the market started melting down, most of our key hedge fund relationships also provided weekly estimates, although many portfolios remained relatively opaque. Funds had wide latitude to do what they wanted when they wanted, and the words “strategy drift” had not gained traction.

Staff was lean. The term “two guys and a Bloomberg” was used to describe funds and it wasn’t meant as an insult. The SEC periodically audited those funds registered as investment advisors, which most were not, and overzealous compliance had yet to become the norm.

Performance, on average, was quite strong, although more than a few “long/short equity” funds were more than 90% net long, capturing the returns of the “greatest bull market in history.” When the market began to sell off, hedge funds in general also flourished (although those 90% net long funds lost their butts). “If there is one thing at which hedge funds excel, it is in avoiding highly publicized, highly priced investments that indexes, by virtue of their construction, must own. Most hedge funds shone during the 2000-02 technology sell-off,” noted even a September 2016 article on the infamous “Buffett Bet” against hedge funds.  

Was the relationship between funds and investors perfect?

Hell. No.

Did fund managers occasionally fake their own kidnappings or end up on 20/20?

Hell. Yes.

But it was what it was. And what it was spawned the investment profile you were so attracted to initially.

And now?

Well, now we’re in an entirely different ball game. The amount of money, the type of investor, the expectations, the regulations, transparency, the number of managers….well, they’re ALL different. And it would be ludicrous to think that those wholesale changes would not have an impact on your investment individually, and on the industry overall.

So what’s changed?

Assets Under Management – The size of the hedge fund industry more than doubled between 2002 and 2007. It grew from $625 billion to $1.8 trillion in five years per Citibank, and the main driver of that growth was some $750 billion in assets poured in by institutional investors. That’s a lot of cash for any industry to eat without some serious indigestion.

Number of Funds – The number of funds increased from the Van Hedge database of 5,000 to the widely accepted industry average of 10,000 between 2002 and 2007. That’s a helluva lot of new funds. Wannabe fund managers flocked to the hedge fund industry to capture higher than mutual fund fees and assets flowing like champagne at a P-Diddy party. And, because hedge fund-land ain’t Lake Woebegone, every fund is not above average. Some of those new entrants struggled to put up decent performance numbers. Prior to 2010, low barriers to entry meant those funds could bootstap a business for years with friends & family funds and few expenses. Now those funds are getting shaken out of the industry. Frankly, that probably needs to happen – those funds aren’t helping industry averages or its street cred. But, overall, I still believe there is a tremendous amount of talent in the hedge fund industry. You just may have to diligence more frogs to find it.

Type of Investors – The HNW individuals and family offices Van Hedge dealt with didn’t really care if they had daily transparency, if a manager invested in something off the beaten path, or whether there was a dedicated CCO, COO, and CFO at the fund. SEC registration wasn’t an issue, nor was an “institutional quality” back office. Concentration limits and stop losses were nice, but not necessary. Was this perhaps a little naive and potentially even a little dangerous for investors? Um, yeah. Sometimes you were the windshield and sometimes you were the bug. But, it has to be said, the expectations, controls, investing parameters and infrastructure that was expected by institutional investors starting in 2007 has a cost associated with it, both in terms of actual expenses (which reduce returns) and in lizard-brain opportunity costs. In today’s investing environment, you may never be the bug, but you’re also a lot less likely to be the windshield.

Marketing – In my early days at Van Hedge, hedge funds were pretty honest about what they were. Many fund managers did their own marketing and stressed strategy, smarts, nimbleness, and a willingness to adapt, adjust, and evolve. Over time, that messaging evolved. The concept of “absolute return” was introduced and almost immediately bastardized. I will never forget a business trip to Japan post-2008 when many of the investors I talked to had been sold hedge funds as a fixed income substitute. WT-Actual-F? Absolute return was never meant to imply that an investment absolutely generates positive returns every month, quarter, year or rolling period, and those that marketed that way did the industry, and investors, a tremendous disservice.

In short, the investment you fell in love with, Dear Reader? It HAS changed - in part, because you asked it to, in part because it was a victim of its own success and in part because expectations on both sides of the fence became disconnected from investment reality.

The question for you, Hedged Up, and for all of those who are disappointed with their “absolute return” portfolio is this: Can you remember what really attracted you to the investment in the first place? Was it the performance? Was it the diversification? Was it the correlation? Was it the belief that you’d never know a single moment of return sadness? Once you’ve figured that out, Dear Reader, you can take a step back from your former investment love and see if there are ways to achieve those goals within today’s hedge fund landscape. I just bet you can find true investment love this time..

Sources: http://www.citibank.com/icg/global_markets/prime_finance/docs/Opportunities_and_Challenges_for_Hedge_Funds_in_the_Coming_Era_of_Optimization.pdf

http://news.morningstar.com/articlenet/article.aspx?id=769179

You Can't Handle This (Hedge Fund) Truth

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

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

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

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

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

Color me PTSD’ed. 

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

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

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

Ho-lee-shit.

My mind started racing.

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

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

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

And then I realized something.

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

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

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

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

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

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

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

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

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

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

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

Take a step back.

Breathe.

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

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

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

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