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