It seems like only yesterday that I started my career in alternative investing. Actually, it was nearly 20 years ago, a fact that hit home as I sat this weekend facing a birthday cake that was more inferno than Instragramable. I thought back to my first job at Van Hedge Fund Advisors as an entry-level hedge fund analyst in 1998 and wondered where the time had gone, when my eyesight went to hell in a handbasket, and how random it was that a “want ad” advertisement led me into what I think has been a pretty good career run.
I also thought back on how much I didn’t know at the time. I had researched stock transfers and HNW individuals during a stint at Vandy, but I honestly knew crap all about the industry or the funds I had been hired to research. So I spent some time over the weekend, in between massage appointment, birthday food and champagne binges, and a mild mid-life crisis, thinking about the advice I would have loved to have had in my salad days in the industry. So without further ado, and in honor of my four-plus decades here on Earth, here are the top four things my current self would love to tell my young self, assuming I could do so while avoiding any universe ending temporal paradoxes.
4) It’s better to know what you know not – As I mentioned, when I got my first job in the industry, I knew literally nothing. I was a sponge. I asked a ton of stupid questions. I read everything and sat in on every meeting that would have me. I felt like a complete moron at times, but I learned a bunch of useful stuff. I also observed other people in the industry and realized that there were four basic categories of alternative investment professionals: Those that knew not and knew they knew not. Those that knew not and knew not they knew not. Those that knew and knew not they knew. And those that knew and knew they knew. I’ll let you guess which groups tended to do better over the long haul.
3) Most hedge funds don’t blow up – I started my job with Van in May 1998, mere months before Long Term Capital Management blew up. When that happened, I freaked the hell out. I thought I had made the worst career move ever and wondered aloud, in front of the CEO of the firm (did I mention I was a moron?), what I had signed up for. In the intervening years, I’ve noted that hedge fund “deaths” remain fairly steady year over year (between 900 and 1,000 funds “die” in any given year), and that the vast majority of these closures are like watching the world’s slowest moving train wreck. You can see the bad performance piling up. You can see assets trickling out. And usually over a period of a year or more, the fund either converts to a family office or announces “there’s no good opportunities in the strategy anymore” and shuts its doors. Sure there have been spectacular blow outs in my 20 year tenure (LTCM, Manhattan, Maricopa, Bayou, Madoff, etc.), and some of these have been frauds, but generally speaking, with some added diligence and a decent redemption policy (and reasonably liquid assets) you can get out of the way before becoming pink mist.
2) Unhedged index returns are about as useful a one legged man in a butt kicking contest - About once per quarter, I see a headline either asking if the latest hedge fund liquidation means hedge funds are going extinct, or announcing that hedge funds “aren’t dead yet,” which always makes me start talking in my best Monty Python voice. Look, I get it. There’s pressure on fees. Performance hasn’t been awesome during this remarkable market run, but then again, that’s really not the point. I used to freak out when people challenged me with the S&P 500 or, back in the day, the NASDAQ’s returns. But then I realized that index returns don’t mean bupkis. Investors who are looking for pure beta should invest in beta. Investors who are looking for diversification or hedging or assets off the beaten path should consider hedge funds. Don’t believe me? Despite underperforming the indices, a Preqin survey showed 45% of hedge fund investors had matched their expectations through June. Investors that want to get it, get it.
1) A good review and understanding of leverage, liquidity, concentration, transparency, complexity and hedging will save you from strategy blunders 90% of the time. The rest of the time you need to understand the manager’s psyche (are they confident or overconfident or a sociopath) and/or specific market scenarios to avoid getting your butt handed to you, performance-wise. Spend your time on evaluating these factors and you’ll have pretty good luck picking funds. If you get too bogged down in checklists, you can miss the big stuff.
Oh, and a few to grow on: Never eat salad before you give a talk. You’ll never look as good in a bathing suit as you do at 20-something so go to the pool at conferences and quit being a wuss. Never order the chardonnay at a conference cocktail party unless you want your tongue to literally itch from all the oak. Don’t overuse “reply all” unless you really want to piss people off. Don’t be afraid to tell managers and investors no. And if a return steam seems impossible to achieve, run.