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

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:

Recent HF Performance (buried)

HF Replication:

Average HF Fees:

Political Agendas & Investing:

Asset Gathering vs. Investment Mgmt:

World's Largest PE Fund:  

Spurious Correlations:

Short-Term Thinking - 5 Months Does Not Track Record Make:


Every Thursday there is a crisis at my house. A big one. It involves Hollywood movie scale running, hiding and yelling. The best FX team has nothing on the Matrix-like special effects that go on Chez MJ. And I can always tell the crisis is starting when I see this:

Yes, my Thursday Crisis is the Invasion of the House Cleaners. It’s scary stuff because, you know, vacuums and rags and spray bottles (oh my!).

How my cats learned to anticipate the Thursday Crisis is beyond me. I suppose there are subtle clues. I get up a little earlier to pick up and unload the dishwasher. (No judgment! I bet if I did a scientific poll about people who clean before their maids arrive the results would show I’m in the majority). I make a least one trip to the laundry room to grab clean sheets and towels. Whatever it may be, Spike and Tyrone have learned to watch for Thursdays with the diligence of Jack Nicolson guarding us against Cuban communism in A Few Good Men (“You can’t handle the vacuum!”).

For the rest of us, watching for the next financial crisis is a bit more nuanced. Last week, for example, I read two articles that made me wonder if we even understand what a crisis is, or if we all believe financial panic is as predictable as my housecleaners’ arrival.

The first article looked at the state of venture capital in the U.S. New figures, released by PriceWaterhouseCoopers and the National Venture Capital Association showed that venture capital investments in companies reached $17.5 during the second quarter of 2015, their highest totals since 2000. However, the article argued that, given that the total projected investment for 2015 (more than $49 billion) was less than the total amount invested in 2000 ($144 billion) and that the number of deals is lower as well, it couldn’t be another tech wreck-venture capital bubble in the making.

The second article looked at the risk precision of Form PF – a document introduced post-2008 to better understand and measure the risks created by hedge funds. The article cited two instances where hedge funds had proven their ability to destabilize economies: George Soros’ attack on the GBP in 1992 and Long Term Capital Management, the first "too big to fail", in 1998. Given that the hedge fund industry is now much larger than it was during those two “crisis”, it of course stands to reason that the risks created by hedge funds are now exponentially greater as well.

Or are they? 

Both articles were extremely interesting and presented compelling facts and figures, but they also were intriguing in that both seemed to assume that, at least in part, we experience the same crisis repeatedly. That perhaps we have a financial boogeyman waiting outside of the New York Stock Exchange every Thursday, much like my housecleaners.

But the reality is, a crisis is often a crisis precisely because we don’t see it coming. Each meltdown looks different, however subtly, from the one that went before. Which begs two questions:

  1. Are we always slamming the barn door after the horses are gone?
  2. And going forward, are we even worried about the right barn door?

Let’s look at a few financial meltdowns as examples.

1987 – Largely blamed on program trading by large institutions attempting to hedge portfolio risk.

1990s – Real estate crisis caused by market oversupply.

1998 – Asian markets (1997) plus Russia plus Long Term Capital Management– a hedge fund leveraged out the ying yang (technical term).

2000-2002 – The tech wreck. Could be blamed on “irrational exuberance”, changes to tax code that favored stocks with no dividends, or excessive investment in companies with no earnings (or products in some cases).

2008 – Credit meltdown created largely by overleveraged consumers and financial institutions.  Real estate crisis created by demand (not supply).

2011 – Sovereign credit issues, not a total meltdown obviously, but noticeable, particularly in many credit markets.

While these are gross oversimplifications of each period, it does show a clear pattern that, well, there ain’t much of a clear pattern. Bubbles happen largely due to macro-economic investor psychology. Everyone jumps on the same bandwagon, and then decides to jump off at roughly the same point. Think of it as Groupthink on a fiscal level. It isn’t easy to break away from Groupthink and it’s often even harder to spot, given that we’re often part of the group when the bubble is building.

So what’s the point of this little rant? Do I think we’re at a new venture capital bubble? I don’t know. The market has changed dramatically since 2000 – crowdfunding, Unicorn Watch 2015, lower costs for startups, and shows like “Shark Tank” are all evidence of that, in my opinion. And are hedge funds creating systemic risk in the financial markets? I don’t know the answer to that question either, but ETFs have now eclipsed hedge funds in size and robo investors are gaining ground faster than you can say “Terminator,” and LTCM was nearly 20 years ago, so it seems unlikely that hedge funds are the sole weak spot in the markets.

I guess I said all that to say simply this: If we spend too much time trying to guard ourselves against the problems we’ve already experienced, we’re unlikely to even notice the new danger we may be facing. If my cats only worry about Thursdays, what happens if the plumber shows up on Tuesday? Panic. If you drive forward while looking behind you, what generally happens? Crash.

Shakespearean Insult.png

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.



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 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. 

In case you missed any of my snappy, snarky blogs in 2014, here is a quick reference guide (by topic) so you can catch up while you gear up for 2015. My blog will return with new content next Tuesday – starting with my "New Year’s Resolutions for Managers and Investors."

“How To” Marketing Blogs


General Alternative Investing

 “The Truth About” Animated Blogs – Debunking Hedge Fund Myths

Diversity Investing

Private Equity and Venture Capital

Emerging Managers

Most of my non-industry friends don’t know what I do. They all know that I do research in finance, but to most, my alternative investment research focus is as mysterious as if I was a pre-Snowden NSA operative. This is in part because many of them consider finance to be frightfully dull. However, the primary reason for their lack of knowledge is something called "accreditation."

The SEC restricts data on and investments in hedge and PE funds (as well as other private investments) to those folks that are “accredited investors.” For decades, being an accredited investor has meant either having a million dollar net worth (excluding your primary residence) or an income of $200k/$300k (single/married). These income and net worth standards are used as a proxy for financial savvy. If you have enough in the bank, then you must understand money, the SEC reasons, and therefore you are allowed to take more risks with your cash.

However, even as I type, the Securities and Exchange Commission Investor Advisory Committee is weighing changes to accreditation standards. Some of the considerations on the table include raising the income threshold to $500,000 and the net worth threshold to as much as $5 million. In addition, there has been mention of a financial literacy requirement, such as passing the Chartered Financial Analyst exam. The monetary requirements would wipe out a huge portion of the HNW investor community, while a CFA requirement would take out a significant portion of the rest. For example, increasing the net worth requirement from $1 million to just $2.5 million would reduce the accredited HNW investor base from 8.5 million to 3.4 million people according to some studies. (

While I understand the urge to “protect” investors, I happen to think these changes are unwarranted and may potentially have a significantly negative impact on innovation and diversity, and ultimately returns, within the alternative investment industry. And frankly the proposed changes just raise a lot of questions for me.

Why this particular threat?

There are a number of financial arenas in which enhanced knowledge, wealth or sophistication could make a material difference in outcomes. For example, according to one study, 15% of all bankruptcies are caused by credit debt, including credit cards, large mortgages, and car payments (

In 2010, there were nearly 1.6 million bankruptcies. So approximately 240,000 Americans potentially could have avoided bankruptcy if the government controlled how much credit one could obtain, how much creditors could extend, or how well people have to understand credit before taking on such burdens.

Likewise, look at day traders. In order to manage a pattern day trading account, one must maintain a mere $25,000 balance. Yet, one study showed that four out of five day traders lose money, while another determined only one out of every 100 day traders consistently make money. Let’s assume that roughly 10,000 people in the U.S. day trade as their primary job. Of those professional day traders, 100 consistently make money and the other 9,900 consistently lose. Why not regulate this more closely? Maybe require a CFA?

And don’t get me started about gambling or the lottery. According to a Gallup Poll on Gambling, 57% of American adults reported playing the lottery in the last 12 months, with 65% of those falling into the $45,000 to $75,000 income bracket ( Your chances of winning the lottery? Less than getting injured by your toilet this year, according to National Geographic. How many folks do you think really understand those odds?

Hell, the average investor can contribute to a Kickstarter campaign for potato salad (over $40,000 raised) or a Chipolte burrito ($1050) which are both completely stupid investments AND utterly unregulated. Or what about Bitcoins? Mt. Gox lost over $409 million for its clients.

In short, there is no end to the ways you can “invest” your money. And any way you slice it, there are plenty of ways that these investments can destroy your wealth. Why doesn’t the federal government care about the “sophistication” required to understand, withstand and mitigate other "investment" risks, particularly ones that have a lot lower chance of success?

Isn’t this a self-limiting problem?

 If this is aimed specifically at hedge funds and private equity, the issue of high net worth investors putting all of their cash into “risky” investments is somewhat limited by the structure of the funds themselves. With high investment minimums (generally between $250,000 to $1 million), it is unlikely that a “lower level” high net worth investor will be able to make more than one investment, if that. For some who are early stage “friends and family” money, those investment minimums may be waived, but then the potential “damage” is mitigated as well. Most managers don’t want a fund filled with small investors (more work, less capital), so they tend to limit small investments. The market forces alone seem to be pretty efficient at limiting the hedge fund investments of your average millionaire in this case.

Won’t this submerge emerging managers?

 One of the arguments to make these accreditation changes is that no one has really squawked about them yet. Of course, this doesn’t take into account that the funds that have the financial wherewithal to actually make a fuss probably won’t even notice. There are about 500 funds that have more than $1 billion or more under management. There are about 5,000 funds that manage less than $100 million. As you look across this size spectrum of funds, the importance of the high net worth investor decreases as the size of the fund increases. Generally speaking, larger funds tend to be better influencers and squeaky wheels. Its likely HNW investors just aren’t a very important part of a large fund's business model any more.

And for those that say HNW isn’t important to the entire industry, it is true that about 65% of the AUM in the hedge fund industry now comes from institutional investors. It’s also true, however, that virtually none of that is in the emerging fund (small, new, women or minority owned) manager category. The 35% of assets that are controlled by HNW and family offices remains vitally important to this group of fund managers. Without access to a significant pool of HNW capital, and specifically early stage “friends and family” capital, many emerging funds might never, well, emerge.

Why do we care? Smaller managers can produce higher returns. Smaller managers can provide liquidity to parts of the market that are ignored by larger funds. Smaller funds may innovate where larger funds may care-take. Limiting opportunities in the emerging manager space is a key step towards the homogenization of the industry.

Will there be any unintended consequences?

Angel investors who help small businesses launch, fund innovation and create jobs would be swept up in this as well.

Of course, I imagine the SEC cares about as much about my opinion on accreditation as my non-industry friends do. So after today's blog, I'm only talking about beer, boats and BBQ. At least until after Labor Day. Enjoy the long weekend, y'all!