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.
- Floss daily
- Exercise 5 days a week
- No carbs
- Spend less
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