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)

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

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." 

Rampallions & Scullions & Hedge Funds, Oh My!

Last week, MarketWatch ran an OpEd on hedge funds that managed to insult nearly every participant in the financial marketplace. Hedge funds were described as “dethroned kings” ruling over an “empire of fools.” Hedge funds are a “cautionary tale” filled with insider trading, poor performance and investor backlash. Why, it is so bad that investors are no longer “dazzled” and hedge funds may be as bad as (gasp!) mutual funds.

I read that article with its virtually Shakespearean array of insults and actually wondered where the author keeps his money. Some folks have wagered it’s either under the bed or in Bitcoin, although I suppose there’s a slight chance it could be in a sock in the freezer. (Friendly note: that’s one of the first places that a thief will check.)

For those of you that are regular readers of my blog, you know that I’ve dealt with a number of the assertions in this article before. Let’s start with performance. There are few places where the phrase “Your Mileage May Vary” is as applicable as it is in the world of hedge funds. While there is no doubt that the average hedge fund return was anemic in comparison to the (insert sarcasm here) infallible S&P 500, an average provides merely that – the arithmetic mean of the top and bottom performers (and everything in between).

Assuming that all hedge funds generated lackluster returns because the average hedge fund did is just, well, silly. You can look at articles such as this CNBC piece or this ZeroHedge article to see hedge funds that didn’t just outperform their industry average, but kicked the pants off of the S&P 500 as well. There were funds that were up 30 percent, 40 percent, 50 percent 60 percent or more, to which I simply say “Thank you, sir, may I please have another?”  (And for those of you that are wondering, that's from Animal House, not Fifty Shades of Grey.)

For more information on The Truth About Hedge Fund Performance, check out my video blog from last quarter.

I’m also not going to get too deeply into the fee equation as I’ve touched on that a time or two as well. I think the last time was a mere two weeks ago in a blog post about duct tape.

But I have to say, what really buttered my toast this time around was the assertion that, in addition to being greedy underperformers, hedge funds have the corner on the insider trading market as well. The hedge fund inclination to insider trading came up twice in MarketWatch’s short post.

So before we start to tar hedge funds with that particular brush, let’s look at SEC data on enforcement actions, shall we?

The chart below shows all SEC enforcement actions across type and year. Note that insider trading is a relatively small category of enforcement actions. Year over year, insider trading accounts for an average of less than 8 percent of the actions of the SEC, with an average of about 50 insider trading enforcement actions per year.

Source: www.sec.gov

Now, even if ALL of the insider trading was committed by hedge funds, it would still represent a very small proportion of the hedge fund world. Take the ever-present 10,000 fund estimate that the industry favors: If all 50 of those annual insider trading schemes occurred in a hedge fund, then 0.05 percent of hedge funds would in fact be knaves and rapscallions.

But we know that insider trading is not solely committed by hedge funds. How do we know? We can again check out www.sec.gov and get a sense of who does commit this crime. Some of my particular favorites? Accounting firm partners, amateur golfers, vitamin company former board member, drug trial doctors, former BP employee, two husbands, Green Mountain Coffee employee, and the list goes on. And it’s true that some of these folks made millions in ill-gotten gains, although one guy got only $35,000 and a jet-ski dock. That dude must LOVE to jet ski.

Look, I’m not saying that some hedge fund managers haven’t done bad things. There certainly are hedge funds represented on the insider-trading list, and just today there was an article on a manager that faked his death to avoid paying back investors. But shenanigans aren’t limited to hedge funds and finance. For example, cell phone companies generate about 38,420 complaints per year, in comparison.

At the end of the day, I just wonder how good it is for the finance industry or for investors to totally defame the entire investment industry and slam hedge funds in particular. I am a fan of exploring all my investment options. Attempting to remove those options through “fund shaming” is ultimately bad for me and other investors. To the extent this kind of misinformation impacts inflows, encourages closures and causes qualified investors to dismiss hedge funds out of hand, it can only result in fewer investment options, lower returns and higher correlations and volatility.