The Wrong Barn Door?

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.

MJ Blog RSS

Sources: http://www.entrepreneur.com/article/248784, http://www.ibtimes.com/hedge-fund-risks-may-be-bigger-regulators-know-despite-dodd-frank-2033322

The Evolution of a Female Fund Manager

It's time for another jaunty infographic blog this week! This time we're looking at the sometimes rocky road from childhood to female fund manager. The excellent news? Parents, educators and employers can all help remove hurdles by being aware of these obstacles and taking small steps to level the playing field, and understanding and encouraging behavioral diversity in investment management. 

(C) MJ Alternative Investment Research

The Confidence - Hubris Conundrum

The dictionary defines hubris simply as “excessive pride or self-confidence.” Personally, I prefer to use the traditional Greek-tragedy definition, which is “excessive pride toward or defiance of the gods, leading to a downfall caused by an inescapable agent.” It’s likely we’ve all experienced hubris in our own lives on at least a small scale. My own “inescapable agents” have at least once arrived in the form of roller skates and tequila. That was pre-Instagram, thankfully.

In the investment management industry, however, hubris is an entirely different animal. And whether the inescapable agent comes in the form of a regulator or the markets, I can tell you that in my 17 years of fund research, I have found few things that will blow up a fund manager faster than a heapin’ helpin’ of hubris. Long Term Capital Management. Beacon Hill. Galleon. Manhattan. Maricopa. Madoff. The list of investment professionals that have bitten the big one thanks to hubris is the stuff that splashy headlines are made of.

Of course, some degree of self-confidence is necessary to become and remain a successful investor. If a fund manager doesn’t have some strength of conviction in an investment, a strategy, a team or him- or herself, compelling, long-term outperformance will be nigh on impossible.

Like many things, however, confidence is a continuum, and when I look at fund managers, I like to see folks who are ideally in the middle of the spectrum. I’ll often take one degree on either side of balanced as well.

But the end of the spectrum? Well, let’s just say them dogs will bite you.

But how do you determine where a current or potential fund manager sits on the Hubrometer? Here are some key questions I’ve asked (and phrases I’ve heard) over the years that may be helpful cues.

1. What are your worst investment nightmare scenarios? Yes, it seems like a somewhat simplistic question, but you would be shocked at the number of managers that either A) can’t come up with a response or B) say they think they have covered all of their bases and don’t have one. As much as I’d like to believe a manager who tells me they’ve hedged everything perfectly and constructed an indestructible portfolio, I’ve got to call horse hockey on that one, friends. Bad things happen to good fund managers. The best managers are always trying to figure out what those bad things may be and position accordingly. Superb managers aren’t afraid to share that information with you because they are confident enough to know that some degree of uncertainty isn’t a sin. And knowing what you'll do when the "fit hits the shan" can be the difference between a containable loss and a catastrophic one.
2. “I think the market is wrong on that one.”  - This phrase is usually uttered when someone has maintained a long-term losing position (or worse, someone who is being creative with their marks). In these scenarios, the market is always wrong - it is never the manager. But let’s remember, in investing, you have to be right and you have to be right at the right time. As Bull Durham said, “Sometimes you win, sometimes you lose and sometimes it rains.” Into every portfolio some rain will fall, and knowing the difference between a spring shower, a drawn out monsoon, and a Noah-esque flood is critical.
3. Any gilding of the lily is a bad, bad sign. This can take the form of inflating assets to appear more credible (you can check assets with a quick call to a custodian & believe it or not, I’ve caught more than one manager with this one) or even providing information on degrees that weren’t actually obtained (no, attending graduate school but not getting the MBA aren’t the same things). The key is to match words with reality here. If a manager says the fund has never been leveraged more than 2:1, look at the audit. If it shows 2.3:1, you need to talk. If a manager gives information about risk controls but then breaks them “just this once,” you’ve got an issue. Little things mean a lot.  And someone who thinks they can get away with a little white lie that can be easily checked is often willing to fib about the bigger things, too.
4. “I’m the only fund manager using this strategy.” While I suppose this could be true, Wall Street is full of pretty smart people. It’s rare that someone finds an edge that another person hasn’t already thought of, or didn’t think of soon after. If you find yourself alone in a strategy, I think a confident person should wonder if it’s possible they are early, illegal or wrong. When I hear this statement I like to ask which camp the manager believes the fund belongs in and why. Then I go see who else is using the strategy. Sometimes this is an honest mistake on the manager's part, and sometimes it's actually fear that if you find other funds that are using the strategy, you may want to invest with them instead (doubt disguised as hubris). Still, always worth checking. 
5. The redeemed investor reference. Redeemed investors are the honey badgers of the investing world. They generally don’t care what gets back to a fund manager and will be brutally honest about when K1s arrived, how easy it was to get in touch with the manager and staff with questions, and what kinds of returns they actually received. Always talk to redeemed investors. Ask them all of the above as well this: “What’s the worst thing you can say about Fund Manager?” Sometimes you get ridiculous answers (I once had a guy describe the insanely fat fingers of a fund manager, concluding the call with “his hands don’t even look human.” Other times I’ve gotten tidbits that were a bit more useful). Look for inconsistencies here, too. 

Of course, these are just a few suggestions to help separate the confident wheat from the hubris chaff. Have other suggestions you’d like to share with your fellow investors? Put them in the comments below. 

Diversification and Alpha - By The Book

A recent article in The Washington Post posited that Americans are currently under-saved by $14 trillion or more for retirement. According to a 2014 Bloomberg report, all but six state pension plans are under-funded by 10% or more, 40 by 20% or more and 31 by 25% or more. Although many investors seem to have forgotten 2008, it was a mere seven years ago that the markets experienced their worst dip since the 1930s, with the S&P 500 losing 38.5% and the Dow dropping 33.8%. Despite a seven-year bull market, we should all do well to remember that poop can, does and will happen. It’s merely a question of when.

In my opinion, that’s why it pays to invest in the “broad market.”

Gender and investing is a sensitive subject. I have a lot of conversations with industry participants about why diversity is good for the financial industry and end investors, and why diverse managers, particularly women, exhibit strong outperformance. I think I’ve created some converts. I think others believe that I’m completely insane. However, I do believe that in order to overcome the tremendous financial hurdles that we face, we must think creatively about how to increase diversification, minimize bubbles and boost returns.

At the end of the day, many financial professionals are trained to think about diversification in a number of straightforward dimensions.

• By Strategy – long-only versus hedged, diversifying strategies (managed futures/macro/market-neutral equity), etc.
• By Instrument – equities, bonds, commodities, real estate, etc.
• By Liquidity – liquid listed instruments versus OTC versus private investments, etc.
• By Number of Investments – the more investments, the less any one can hurt a portfolio

But what we really don’t spend much time thinking about is diversification of behavior. Behavior is an inescapable reality of investing. What happens to your investments is undeniably impacted by behavior – yours, your broker, your money manager and macro-economic behavior - they all play a role in generating gains and losses.

As a result, I believe it’s key to not only have a diversified portfolio of investments with different and diversifying strategies and instruments, it’s also important to have investment managers that will behave differently when approaching the markets. And that’s where women come in.

A number of research studies show that women approach investing differently than men in terms of:

1. Biology – Even though women are often stereotyped as “more emotional” when it comes to investing, that may not be the case. Brain structure and hormones impact how men and women interact with the markets, and can influence everything from probability weighting to risk taking to market bubbles.
2. Overconfidence – There have been a number of studies that show men have a higher tendency to be overconfident investors. Overconfidence can manifest in a myriad of poor investment practices, including overconcentration in a single stock, not taking money off the table, riding a stock too far down (“It will come back to me”) and overtrading.
3. Better trading hygiene – One very crucial side effect of overconfidence is overtrading. Overconfident investors tend to act (buy or sell) on more of their ideas, which can lead to overtrading. Over time, overtrading can significantly erode investment performance.
4. Differentiated approach to risk – Although women are often stereotyped as being more “risk adverse,” the truth of the matter is a bit more nuanced. Men and women weigh probabilities differently, with women generally having a flatter probability weighting scale. This means they tend to not to inflate expected gains as much as their male counterparts, which can be beneficial in risk management and in minimizing overall market bubbles.
5. Avoiding the herd – Women may be more likely to look at underfollowed companies, sectors, geographies or deal flow in order to obtain an investment edge.
6. Maintaining conviction – Female investors may be better at differentiating market noise from bad investments. Women tend to be less likely to sell underperforming investments simply because of broad market declines.

There have been a number of studies that showcase that these differentiated behaviors can really pay off. From studies by HFR, Eurekahedge, Vanguard, my work at Rothstein Kass (now KPMG), NYSSA, the University of California and other academic institutions, research suggests that women’s cognitive and behavioral investment traits are profitable.

Alpha and additional diversification - how can that possibly be a bad thing?

Now, before I become a complete pariah of the financial world, I’m not saying that investors should eschew male-managed funds for sole devotion to women-run funds. That would merely switch the behavioral risk from one pole to another. What I am suggesting is that if we are focused on minimizing risk and maximizing return, we should at least consider the idea that cognitive and behavioral alpha do exist and pursue them through allocations to women (and minority) fund managers.

Of course, anyone who has spoken with me over the last, oh, two years, knows by now that I’ve been faithfully working on a book that addresses these very issues. Today, after furious scribbling, interviewing, transcription, and maybe just a little swearing and throwing of my cell phone, Women of The Street: Why Female Money Managers Generate Higher Returns (and How You Can Too) was released by Palgrave Macmillan.

Available on Amazon.com and other book retailers.

To be honest, I kind of want to barf when I think about people reading my behavioral manifesto. But mostly I just hope that it makes us think about what we all stand to gain by looking not just for the next Warren, Julian, John or David, but also for the next Marjorie, Leah, Theresia and Olga.

Sources: CNN Money, The Washington Post, Bloomberg, Women of The Street: Why Female Money Managers Generate Higher Returns (and How You Can Too).

Fun with Dots! Visualizing Trends in the Hedge Fund Industry

When most people think about math, they don’t necessarily think about visual aids. They think about numbers. They think about symbols. They may even think, “Oh crap, I hated math in high school.” Even if you are in the last camp, read on. I promise what follows is painless, although you may be tested on it later.

A lot of times, what’s problematic for people about math is that picturing and therefore connecting with what we’re talking about, particularly when dealing with large numbers, can be difficult. For example, I talk endlessly about the inequities in the hedge fund industry, and yet while some folks hear it, I’m not sure how many people “get it.” So today, we’re going to “connect the dots” to visualize what is going on in hedge fund land.

First, meet The Dot Fund, LLC. 

•  

This dot represents a single, average hedge fund. The fund probably has a pitch book that states its competitive advantage is its "fundamental bottoms up research." This makes me want to shake the Dot Fund. But I digress.

Now, most folks estimate that the hedge fund universe contains 10,000 funds, so here are 10,000 dots. Each smaller square is 10 dots by 10 dots, for a total of 100 dots, and there are 10 rows of 10 squares. Y’all can count them if you want to – I did and gave myself a wicked migraine – but this giant square of dots is pretty representative of the total size of the hedge fund universe.

The Hedge Fund Universe

Of course, the hedge fund universe isn’t as homogenous as my rows of dots, so let’s look at some of the sub-categories of funds. The blue dots below represent the “Billion Dollar Club” hedge funds within the universe. That is not a ton of dots.

The Billion Dollar Club Hedge Funds

And here are the Emerging Managers, as defined by many pension and institutional investors as having less than $1 billion in assets under management. Note: That’s a helluva lot of blue dots.

Institutionally Defined “Emerging Managers”

This is the universe of managers with less than $100 million under management, or what I would call the “honestly emerging managers.”

Managers With Less Than $100m AUM

This dot matrix represents the average number of hedge funds that close in any given year. It doesn’t look quite as dire as the numbers do in print...

Annual Hedge Fund Closures

Finally, here are the women (stereotypically in pink) and minority owned (in blue) funds that I estimate exist today.

Diversity Hedge Funds

While estimates of capital inflows vary, eVestment suggests roughly $80 billion in asset flows for 2014, while HFR posits $88 billion. Because the numbers are fairly close, I'm using HFR, but the visual wouldn't be vastly different if I used another vendor's estimate. Here is the HFR estimate of $88 billion in asset flows represented as 1 dot per $1 billion.

2014 Estimated Asset Flows into Hedge Funds

Now, here is the rough amount of those assets (in blue) that went to the Billion Dollar Club hedge funds (also in blue).

Fund Flows Into Large Hedge Funds

And here is the rough proportion of those assets that went to everyone else.

Fund Flows Into Emerging Hedge Funds

Not a pretty picture, eh?

So, what’s the point of my dotty post? While I think we all have read about the bifurcation of the hedge fund industry into assets under management “haves” and “haves nots,” I’m not sure everyone has actually grasped what’s going on. I’m told that a picture is worth a 1,000 words, so maybe this will help it sink in. Not investing in a more diverse group of managers creates a very real risk of stifling innovation and compromising overall industry and individual returns. It also creates a lot of concentration risk - if a Billion Dollar Club fund fails, a large number of investors and a huge amount of assets could be at risk.

And the kick in the pants? We know this pattern isn't the most profitable. A recent study showed pension consultants underperformed all investment options by an average of 1.12% per year from 1999-2011, due largely to focusing on the largest funds and other "soft factors." And lest you think 1.12% sounds small, let me illustrate that for you, too. Here are one million dots, where each dot represents a dollar invested. The blue dots are the cash returns over time that were missed by not taking a more differentiated approach. Ouch. 

Cash Return Differential 1999-2011

Luckily, the cure is simple. Commit to connecting with different and more diverse dots in 2014.

Sources: HFR, eVestment, MJ Alts, Value Walk, "Picking Winners? Investment Consultants' Recommendations of Fund Managers" by Jenkinson, Jones (no relation) and Martinez.

What’s In A Name? What Fund Manager Names Tell Us About Diversity

William Shakespeare once asked, “What’s in a name?” believing, as many do, that “a rose by any other name would smell as sweet.” But on this point I must take issue with dear William and say instead that I think names have power. Perhaps this notion springs from being reared on the tale of Rumplestilskin or maybe from teenage readings of The Hobbit. It could be from my more recent forays into Jim Butcher’s Harry Dresden novels.

I know, I know - I never said I wasn’t a nerd.

Regardless of the origins of my belief, my theory was, in a way, proven earlier this week, when the New York Times ran a piece by Justin Wolfers entitled “Fewer Women Run Big Companies Than Men Named John.” In it, the writer created what he called a “Glass Ceiling Index” that looked at the ratio of men named John, Robert, William or James running companies in the S&P 1500 versus the number of women in the same role. His conclusion? For every one woman at the helm of a large company, there are four men named John, Robert, William or James.

To be clear: That’s not just one woman to every four generic men. That’s one woman for every four specifically-named men.

Wolfers’ study was inspired by an Ernst & Young report that looked at the ratio of women board members to men with the same ubiquitous monikers. E&Y found that for every woman (with any name) on a board, there were 1.03 men named John, Robert, William or James.

The New York Times article further showed that there are 2.17 Senate Republicans of the John-Bob-Will-Jim persuasion for every female senate republican, and 1.12 men with those names for every one female economics professor.

While all of that is certainly a sign that the more things change, the more they stay the same, it made me think about the financial world and our own glass ceiling.

In 17 years in finance, I have never once waited in line for the bathroom at a hedge fund or other investment conference. While telling, that’s certainly not a scientific measure of progress towards even moderate gender balance in finance. As a result, I decided it would be interesting to construct a more concrete measure of the fund management glass ceiling. After hours of looking through hedge fund & private equity mogul names like Kenneth, David, James, John, Robert, and William, I started referring to my creation as the “Jim-Bob Ratio,” as a good Southern girl should.

I looked at the 100 largest hedge funds, excluded six banks and large fund conglomerates that are not your typical “cult of personality” hedge fund shops, created a spreadsheet of hedge fund managers/founders/stud ducks and determined that the hedge fund industry has a whopping 11 fund moguls named John, Robert, William and James for every one woman fund manager. There was a 4:1 ratio just for Johns, and 3:1 for guys named Bill.

(c) MJ Alts

And even those ratios were generous: I counted Leda Braga separately from Blue Crest in my total, even though her fund was not discretely listed at the time of the 2014 list.

I also looked at the monikers of the “grand quesos” at the 20 largest private equity firms. There are currently three Williams, two Johns (or Jon) and one James versus zero large firm female private equity senior leadership.

Of course, you may be saying it’s unfair to look at only the largest funds, but I doubt the ratio improves a great deal as we go down the AUM food chain. There are currently only 125 female run hedge funds in a universe of 10,000 funds. That gives an 80:1 male to female fund ratio before we start sifting through names. In private equity and venture capital, we know from reading Forbes that women comprise only 11.8% (including non-investment executives) and 8.5% of partners, respectively. Therefore, it seems extraordinarily unlikely that the alternative investment industry’s Jim-Bob Ratio could fall below 4:1 even within larger samples. Ugh. One more reason for folks to say the S&P outperformed.

Now, before everyone gets their knickers in a twist, I should point out that I am vehemently NOT anti-male fund manager. The gentlemen on those lists have been wildly successful overall, and I in no way wish to or could diminish their performance and business accomplishments. And for those that are also wondering, I am also just as disappointed at the small (read virtually non-existent) racial diversity ratio on those lists as well. 

What I am, however, as regular readers of my blogs know, is a huge proponent for diversity (fund size, gender, race, strategy, fund age, etc.) in investing and a bit of a fan of the underdog. Diversity of strategies, instruments, and liquidity are all keys to building a successful portfolio if you ask me. And, perhaps even more importantly, you need diversity of thinking, or cognitive alpha, which seems like it could be in short supply when we look across the fund management landscape. Similar backgrounds, similar stories, and similar names could lead to similar performance and similar volatility profiles, dontcha think? While correlation can be your friend when the markets are trending up, it is rarely your bestie when the tables turn. And if you don’t have portfolio managers who think differently, are you ever truly diversified or uncorrelated?

In the coming months and years, I’d like to see the alternative investment industry specifically, and the investment industry in general, actively attempt to lower our Jim-Bob Ratio. And luckily, unlike the equity markets, there seems to be only one way for us to go from here. 

Sources include: Institutional Investor Alpha magazine, Business Insider, industry knowledge and a fair amount of tedious internet GTS (er, Google That Stuff) time. 

Pattern Recognition May Make You Poorer

As I was trapped in my Nashville home awaiting rescue after Snowpocalypse 2015 from one of Tennessee’s (not kidding) FIVE mid-state snowplows, I watched a lot of television, ate a lot of carbs and tried to fight off scurvy with gin and tonics and a splash of precious lime juice. But at some point, in between re-runs of Shawshank Redemption, Aliens and The Matrix, I was struck by the increasing mainstreaming of behavioral finance.

An advertisement for the Chevrolet Colorado, what is known in the Deep South as a “Big ‘Ol Truck,” highlighted a series of focus groups weighing in on the characteristics of two men, Truck Guy and Sedan Guy. 

Truck Guy and Sedan Guy from Chevy Colorado Commercial

Now, of course Truck Guy and Sedan Guy are, in fact, the same person, but groups of children, adults, single women, bearded men and old folks were asked to describe the characteristics of each man. The result? Truck Guy was rated as 85% more handsome, 76% more resourceful and 100% more likely to have an “awesome pet” than Sedan Guy.

While it may seem like a silly commercial, and obviously one geared towards my fellow Southern brethren, the reactions of the Chevy focus groups were not unlike the biases displayed in other walks of life. Like it or not, pattern recognition and its resultant behavioral biases are active in every decision you make. Unfortunately, in investing, it may be making you poorer.

Pattern recognition, in particular template matching, is the process by which our brains save time. The brain, which consumes more energy than any other organ in the human body, tries to expend the least energy possible to process data and make decisions by taking incoming sensory data and comparing it to what has already been stored in our memory. Hence why a simple picture of Truck Guy elicited judgments about his character and choice of dog when he was otherwise wholly unknown to the focus groups.

It's true pattern recognition can be beneficial – after all, it would be time consuming and exhausting to start over fresh with each new data set all the time a la 50 First Dates – it can also stand in the way of innovative and profitable thinking. In investing, for example, pattern recognition may impact where you direct your capital.

Let’s consider capital flows of assets into hedge funds, venture capital and private equity.

Hedge Funds – In 2014, 86.9% of asset flows went to funds with more than $1 billion under management per HFR. The “Billion Dollar Club” is approximately 500 funds out of an overall universe of roughly 10,000 funds. Per Pensions & Investments, the 25 largest hedge funds control 46% of all hedge fund assets as of the end of the year.

Venture Capital – Per the Wall Street Journal, venture capital firms raised $32.97 billion in 2014, with a mere 8 venture capital firms of $1 billion in AUM or more accounting for just over one-third of that total.

Private Equity – According to industry watcher Preqin – only 7% of the $486 billion raised in 2014 went to first time funds.

Looking at data like this, it’s clear that investors are thinking along the same lines:

·      I should only invest with firms that are BIG.

·      I should only invest with firms that are old (uh, “established”).

·      I should only invest with firms populated by the pale and male.

To many, this seems like a relatively “safe” approach to investing, along the lines of “No one gets fired for buying IBM.” Unfortunately, it doesn’t leave a lot of room for innovation, eye-popping returns, cognitive diversity and true diversification. So by sticking with these established patterns, what are investors potentially leaving on the table?

1)   Research has consistently shown that smaller funds (particularly on the hedged side) often perform better due to the ability to invest in niche plays and club-sized deals. In an increasingly volatile market, smaller funds may be able to be more nimble and liquidate positions in a pinch more easily than larger funds.

2)   Research has also shown that younger firms may post higher returns as well, due in part to the smaller fund sizes above as well as a smaller safety net provided by management fees.

3)   Research has shown that inclusion of women and minorities may increase returns, in some cases substantially. This cognitive and behavioral alpha may not be available, or may be available only in a limited fashion, at the industry’s largest firms. In addition, a lack of diversity at the fund management level may result in less diversification of deals, stocks, ideas and positions, creating additional correlation within a portfolio. In short, investors may not be as diversified as they think they are if all of their managers think alike.

At the end of the day, pattern recognition has created wealth, but it also leaves money (and risk) on the table. It seems to me that we could all be better off, richer and get better gas mileage if we left our prejudices at the door and just rode with Sedan Guy for a while. 

In Case You Missed Them - 2014 Blogs By Topic

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

http://www.aboutmjones.com/blog/2014/12/8/anatomy-of-a-tear-sheet

http://www.aboutmjones.com/blog/2014/11/12/emerging-manager-2015-travel-planner

http://www.aboutmjones.com/blog/2014/10/21/conference-savvy-for-investment-managers

http://www.aboutmjones.com/blog/2014/9/11/ten-commandments-for-pitch-book-salvation

http://www.aboutmjones.com/blog/2014/7/18/emerging-managers-the-pitch-is-back

Risk

http://www.aboutmjones.com/blog/2014/11/10/look-both-ways

http://www.aboutmjones.com/blog/2014/11/3/the-honey-badger

General Alternative Investing

http://www.aboutmjones.com/blog/2014/10/25/earworms-and-investing

http://www.aboutmjones.com/blog/2014/10/7/alternative-investment-good-newsbad-news

http://www.aboutmjones.com/blog/2014/9/17/pay-what

http://www.aboutmjones.com/blog/2014/7/21/investing-and-the-law-of-unintended-consequences

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

http://www.aboutmjones.com/blog/2014/10/13/the-truth-about-hedge-fund-correlations

http://www.aboutmjones.com/blog/2014/9/6/the-truth-about-hedge-fund-performance

http://www.aboutmjones.com/blog/2014/8/8/the-truth-behind-hedge-fund-failures

Diversity Investing

http://www.aboutmjones.com/blog/2014/12/8/getting-an-edge-in-private-equity-and-venture-capital

http://www.aboutmjones.com/blog/2014/11/21/the-simple-case-for-emerging-managers

http://www.aboutmjones.com/blog/2014/9/29/mi-alpha-pi-a-look-at-the-sources-of-alpha

http://www.aboutmjones.com/blog/2014/7/21/affirmative-investing-putting-diverse-into-diversification

Private Equity and Venture Capital

http://www.aboutmjones.com/blog/2014/12/8/getting-an-edge-in-private-equity-and-venture-capital

Emerging Managers

http://www.aboutmjones.com/blog/2014/11/21/the-simple-case-for-emerging-managers

http://www.aboutmjones.com/blog/2014/11/12/emerging-manager-2015-travel-planner

http://www.aboutmjones.com/blog/2014/9/29/mi-alpha-pi-a-look-at-the-sources-of-alpha

http://www.aboutmjones.com/blog/2014/8/25/submerging-managers

Getting an Edge in Private Equity and Venture Capital

My gym teacher in junior high was a woman named Mrs. Landers. While I truly hated gym, Mrs. Landers was a godsend to an uncoordinated nerd like me.

You see, Mrs. Landers didn’t put your entire gym class grade in one basket. You got 50 points (out of 100) from “dressing out.” By simply changing from my Molly Ringwald-esque garb into a grotty Northport Jr. High gym-suit, I could get halfway to the “A” I craved. The written test counted for another 20 points. “Hello passing grade!” And I hadn’t even broken a sweat. The last 30 points came from actual physical activity, and admittedly, those I struggled with. But volunteer to put up the volleyball net? Five points. Get Mrs. Landers a diet coke and bag of Frito Lays to eat while she supervised our Jane Fonda workouts? Two points. Inevitably by the end of the semester, I had secured an A in gym without ever hitting, catching or running with a ball.

Finding more than one way to skin a cat is often a recipe for success. Today, Private Equity (an altogether different form of PE) has $1.04 trillion of dry powder, the highest on record according to the Private Equity Growth Council. As a result, there is a need to think creatively to ensure the best possible performance outcome for GPs and LPs alike. 

Cognitive alpha does exist in PE and in Venture Capital. There have been studies that show the excess return or alpha of women and minority owned firms in particular within the PE/VC space, although unfortunately there is a very small sample to study. Less than 1% of PE and VC firms are run or heavily influenced by women and minorities, along with less than 0.25% of the assets under management.  

And yet studies have shown that this small group “gets ‘er done.”

In one NAIC study of women and minority owned Private Equity, diverse firms delivered 1.5X return on investment versus 1.1X for non-diverse firms from 1998 to 2011. In the RK Women in Alternatives Study I authored in 2014, women-run PE firms outperformed the universe at large by one percentage point in 2013.

Now some would insert a best and brightest argument here: with such a small sample, isn't it only the best and brightest women and minorities that are able to rise through the PE and VC ranks to start a fund, causing the large return differential?

My answer is that I believe the reasons for outperformance go much deeper, well into the realm of behavioral finance. Two possible reasons for strong outperformance are pattern recognition and differentiated networks.

Pattern recognition – Even though our brains consume roughly 20% of the calories we take in, making it the greediest organ in our bodies, it is always looking for shortcuts. One of the ways it conserves energy is through pattern recognition. We tend to look for patterns in data so we can make decisions faster. In PE/VC, that means we look for companies that look similar in some way to past successes, and place our bets with those. Women and minorities may be able to recognize different patterns, allowing for profitable investments that are more “outside the box.”

Differentiated networks – Women and minority owned or influenced firms may be able to find differentiated deals due to expanded or different networks. It’s true that anyone who goes a traditional route to PE or VC has some overlap of network (B-school, analyst training programs, etc.) but even subtle differences in network can lead to differentiated deals with less crowding and less competition.

These two characteristics may help women and minority owned and influenced PE and VC to excel in an environment with a tremendous amount of dry powder. It may also lead them down roads less traveled in PE and VC – towards minority and female founders. A recent McKinsey study of UK companies found firms in the top 10% of gender and racial diversity had 5.6% higher earnings while firms in top quartile of racial diversity were 30% more likely to have above-average financial returns. Both desirable traits in a PE or VC portfolio. However, those firms don’t generally fit into the traditional PE and VC mold, as evidenced by the fact that minority and female owned companies are 21% and 2.6% less likely to get funded, respectively, according to Pepperdine University.

In a world where there is a tremendous amount of dry powder, increasing interest in PE/VC from institutions and individual investors alike, and where returns are, as always, key, every advantage is important. For investors looking for that extra “je ne sais quoi,” women and minority owned or influenced firms may be the ticket. For PE and VC firms looking to get an edge on competitors, diversity hiring could be in order, because unlike my gym class, there are no points awarded for simply getting dressed every morning.

Look Both Ways

Throughout my childhood I owned and rode a bike. In the 70s and 80s, no one gave two figs whether I did so wearing a helmet or not. Seriously, we drank out of the garden hose and trick or treated at houses where we didn’t know people, too. Those were wild and crazy years.

In the 1990’s, however, someone decreed that biking was entirely too dangerous to be attempted without a helmet. I promptly stopped biking. For those of you that have met me, or who have even seen my picture, you probably recall one critical fact about my appearance: I have Big Hair Syndrome.’ And it ain’t fitting under a bike helmet.

Flash forward 20 years and we’re discovering some interesting facts about the bicycle helmet craze. In places where bicycle helmets were required by law, bike trips decreased by 30-40% across all demographic groups and by 80% across secondary school aged girls.

Unfortunately, when people gave up their bikes, they also gave up the health benefits of riding. One study by the Brits suggested that the health benefits (in terms of increased longevity) of riding outweighed the risk of injury by 20:1. A study done in Barcelona put this figure at 77:1. In Australia, they found 16,000 premature deaths caused by lack of physical activity dwarfed the roughly 40 cycling fatalities that occurred each year.

And that’s the curious thing about risk. You can focus on a single risk (in the case of biking, that a head-on collision will occur at 12.5 mph) to the exclusion of all else and actually increase your risk of other types of injury.

This is especially true in investments, where there is no single definition of risk. There are a multitude of risks against which to guard, and most of them have corresponding risks they introduce. For example, if you maximize the risk of illiquidity (the risk that you can’t get to your money when you need it) you may compromise returns. Private equity has been the best performing strategy over the last 10 years, but locks up capital for 5-10 years depending on the fund. Likewise, venture capital, which has been on fire for the last few years, has a 10 plus year lock up.  Requiring high liquidity restricts the types of investments you can make, which can impede diversification. More liquid investment structures can have lower returns than less liquid investments because they allow for people to trade at exactly the wrong times. Don’t you know someone who sold his or her mutual funds or index funds at the exact bottom of the market? In addition, there can also be a lower premium on more liquid instruments.

Or consider headline risk. Remember the Chicago Art Institute and Integral Capital? When Integral blew up and the Art Institute was a large, and the only, institutional investor in the fund, the headlines abounded. Since that time, there’s been an acknowledged risk of being in the headlines for losing money. For this reason, many investors stick to the same small group of funds so that they’re not alone should the ‘fit hit the shan.’ Unfortunately, this leaves a lot of smaller, less-well-known managers in the cold, and can compromise returns as well.  It also increases concentration in a small number of managers, funds and strategies.

And what about fee risks? Being ‘penny wise and pound foolish’ can block access to some of the most successful (read: non-negotiable) managers and funds. It can also cause investors to eschew entire asset classes (private equity, hedge funds) increasing correlations and concentrations and reducing diversification. Or what about the risk of not beating a benchmark like the S&P 500? Chasing returns is not very productive in the long run, and it can cause investors to take unnecessary risks in order to beat a rising benchmark. It’s also difficult to outperform on both the up- and down-side, so targeting outsize bull market returns can lead to bear market catastrophes.

In short, there’s no such thing as a free lunch. Protect yourself single-mindedly from one risk, and you just increase your odds of obtaining a different type of injury.

The Honey Badger

One night last weekend, I was in bed reading when I was distracted by a noise coming from the bookcase in my master bedroom. I heard a thump and then scratching. Convinced it was one of my pets messing with my suitcase, which was out and packed for a trip the next day, I ignored the sounds. Thump, scratch. Thump, scratch. Thump, scratch. Finally I sat up in bed to admonish my cat for being a pest, however I quickly noted that said cat was on the other side of the room. And he was staring intently at the bookcase.

Thump, scratch.

Thump, scratch.

When I got up to look more closely at the bookcase, the door actually opened a little bit. The thump of it shutting was followed immediately by scratching noises. I stared at the door. Thump, scratch. I wondered if I should open it and see what was in there. Thump, scratch. I was pretty convinced it was an animal. Thump, scratch. A squirrel perhaps. Thump, scratch. Maybe even a honey badger.

Thump, scratch.

Whatever it was, I was sure it had rabies.

Thump, scratch.

I called the wildlife removal company and asked if they could come in the morning. They assured me that they would be at my house at 8:00 am, and I went to bed downstairs – after taping the doors shut and barricading the rabid honey badger in the cabinet with an ottoman.

THUMP, SCRATCH!

The wildlife people came to my house after I left for the airport, but called me to report on their findings before my flight took off.

“Ma’am, we’ve contained the situation,” they said.

“Was it a honey badger?” I asked.

“No, ma’am. Your DVD player turned on and was trying to open, which bumped the door. Then it spun and scratched the door, before shutting and trying to open again.”

Yes, the wild animal in my house was a vicious DVD player.

Why am I telling you this pretty humorous but somewhat embarrassing story? Because every person to whom I’ve told the story in person asked me the same question: “Why didn’t you open the cabinet door and look?” My answer? At the end of the day, I knew I had two long-term solutions to the problem. Either the wildlife folks would show up in 24 hours and remove the critter, or it would die and I could safely remove it myself with gloves and a shovel. I didn’t need to act right away, and doing so could actually have caused more damage.

The same thing is going on in the markets right now. The thumps and bumps of market volatility have a lot of folks spooked. But some people are checkers – they look at what the market is doing daily and try to develop a short-term solution. They are convinced if they act now, they can save themselves from whatever may be lurking in the dark. Other people are waiters. These folks develop a long-term solution and trust that their plan will work out for them in a defined period of time.  I’ll let you guess who sleeps more soundly through the thumps and scratches.

The key to surviving volatility, hysterical commentators, and even market corrections (which will happen), is to have a long-term plan. To be able to disengage enough from the noises in the night to ask the following questions:

“Would I buy this stock/invest in this manager/choose this strategy today?”

“Has anything fundamentally changed with this stock/manager/strategy or is this purely market movement?”

“Do I need liquidity from this investment now or in the immediate future?”

“What conditions would need to be in place for these undesirable changes to become the new status quo? Are those conditions likely to occur?”

By logically thinking through what might be causing the noise, it is possible to develop and stick to a plan that reduces reactivity and focuses on long-term goals and objectives. After all, in the words of Warren Buffett, “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”

 Don’t get me wrong. I am a fan of active investing and I’m not saying, “let it ride no matter what!” I am not, however, a fan of re-active thinking. I believe successful investments require discipline. And while you might jump when you hear noises in the market, you need a plan and conviction to avoid letting the rampaging honey badger into your portfolio.

Earworms and Investing

In 1965, the Byrds released Turn! Turn! Turn! The song’s lyrics were taken almost directly from Ecclesiastes and promises: “to everything there is a season.” After reading that Macro funds made an overdue performance comeback in September 2014, I walked around my office singing that hippie ditty all day. While it was an annoying earworm in less than an hour, after nearly four years of market gains, maybe we could all use a little repetitive reminder that investment strategies fall in and out of favor.

If you look at Hedge Fund Research’s top performing strategies for the last 14 years, for example, you can easily see where investors might have some short-term memory loss when it comes to performance. After all, the S&P 500 has taken top performance honors for the last 3 out of 4 years. If you look at the last decade, however, you can see that Emerging Markets strategies have been at the top of the charts for three years as well. In fact, the S&P 500 and Emerging Markets hedge funds have been as equally likely to lead the pack as to end up in the bottom half of investment strategies over the past decade. And Macro/CTA funds, which have been both maligned and heavily redeemed from in past months, were the number two performing strategy in 2007 and 2008 at the height of the financial crisis. Many investors were extremely happy to have allocations to those strategies at that time, and flows into CTA/Macro surged in the 12 to 18 months that followed the market meltdown. Interestingly enough, however, Macro’s top-notch performance was preceded by, you guessed it, bottom half performance rankings in the years immediately prior to the crisis.

And hedge funds aren’t the only alternative investments to fall into cyclical patterns.  While venture capital is positively on fire now, it has been a long road to recovery in the wake of the tech wreck. According to data from Cambridge Associates, US Venture Capital funds returned 26.1% over 15 years, but only 8.6% over the past 10 years and 7.5% over the past 5 years. Now venture capital is coming back with a vengeance, with a three-year return of 14.4%. There is even talk of a new VC bubble, which was probably pretty unimaginable just a few years ago.

Even private equity, which seems untouchable at this point, has its good and bad performance periods. With a 15-year return of 12.0%, according to Cambridge, a five-year return of 11.0% and a one-year return of a whopping 17.2%, private equity is clearly not immune to some degree of strategy cyclicality.

Why does this matter? We all have a tendency to chase winners and sell losers, whether they are strategies or managers, and even when we know that investment philosophy doesn’t often work. For example, a study by Commonfund Hedge Fund Strategies Group in August 2014 showed that chasing returns was not a long-term strategy for success. The study concluded that “there may be a natural tendency for hedge fund investors to gravitate toward managers that have captured a significant share of the market’s upside. However, since such equity upside capture is not common or persistent among hedge fund strategies, using it as a selection criterion may lead to adverse selection.”

Investing isn’t easy. It can be a fight against your instincts and ingrained behavior. So it’s healthy to take a moment every once and a while to remember that markets change and that strategies come in and out of favor. A relentless chase of returns is not only exhausting, but often suboptimal. And by definition, if you’re chasing returns, you’re already behind. 

Alternative Investment Good News/Bad News

Good News

According to HFR, emerging managers performed best during last 12 months, gaining 11.3% through 1H2014.

Diversity funds (women and minoirites have outperformed the HF universe at large during the last 12 months, gaining 11.1% through 1H2014

Marco/CTA funds led performance in August 2014. The beginning of a comeback?

Pattern recognition helps PE and VC firms recognize successful investments?

Seven high quality hedge fund start ups launching in London

CALPERS sticking with Private Equity despite "complexity and fees."

Companies founded by women yeild 12% more for their VCs and use 1/3 less capital

IFK will welcome two women to the stage in 2014, Nehal Chopra and Nancy Prial.

Hedge fund liquidations declined in 2Q2014 according to HFR.

Skill is back? Fed says "moderately active" outperforms passive investments.

NY Common's equity hedge managers exhibit "above averages stock selection skill.

Bad News

The largest, most established U.S. based hedge funds control more assets than ever before, with $1.8 trillion as of July 2014.

Many women and minority led hedge funds continue to struggle with AUM, and therefore face the same fund flow problems as other emerging funds.

156 trend following CTAs liquidated, the first decline in the number of CTAs since 2005.

But keeps VCs from hiring women & minority staff and investing in diverse founders?

Not a single female manager listed among them.

CALPERS decision to exit hedge funds used as a club in the fee war.

Women run companies received just $1.5b out of a possible $50.8 billion from VC firms

In the previous five years, only one woman, Meredity Whitney, had been included.

Trailing 12 month liquidiations was still the highest it has been since 2009.

Blackrock research shows "alpha trades" don't work.

Articles on HFs still act as if beating the S&P 500 is relevant.

Mi Alpha Pi – A Look At The Sources of Alpha

While at the Grosvenor Small and Emerging Managers Conference last week in Chicago, I started thinking about alpha. Despite all of the naysayers out there quick to announce the death of alpha, I would actually suggest that alpha is alive and well and living in many portfolios. I think maybe investors, quick to flock to a very concentrated handful of extremely large funds, have forgotten where alpha lives and what drives alpha. 

For that reason, I’d like to announce the formation of a new co-ed fraternity. A fellowship, if you will, called Mi Alpha Pi. Mi Alphas have no dues and no secret handshake. We are merely called upon to remember that alpha comes in different size funds, diverse managers, life cycle investing and from innovators. 

MI ALPHA PI

WHERE DOES ALPHA COME FROM?

Skill – Obviously, this is what we want in all of our hedge fund managers: the ability to find and make the most of investment opportunities. Skill comes from a variety of sources. Intelligence, experience, intuition, emotional awareness and other factors contribute to manager skill. Skill is long-term and must be judged in a variety of market environments, good and bad. And in Mi Alpha Pi, we don’t believe that short-term losses necessarily are indicative of loss of strategic acumen. We even have special hazing for investors that think that way.

Cognitive Alpha – Cognitive alpha comes from being able to think about the markets and investing differently than your investing peers. Instead of looking at Apple and AIG along with every other large hedge fund, these managers look outside the box. Many investors have a tendency to be heavily influenced by market news and earnings and, over time, buying attention-grabbing stocks has a tendency to diminish returns. How do you find cognitive alpha? Look to contrarians, women and minority run funds for less homogenized thinking.

Structural Alpha – There has been a plethora of research, including my own at PerTrac, that suggests smaller, emerging managers outperform larger, older funds. One of the reasons why this may occur is what I will call “structural alpha.” When a fund is small it can take advantage of niche plays and club-sized deals that larger funds may ignore. They also may have fewer issues with liquidity, volume and short-squeezes. As a result, emerging funds may be able to exploit their smaller structures to produce outsized gains.

Behavioral Alpha – Although it’s difficult to separate behavioral alpha from cognitive alpha, I think it is an important distinction. Cognition is how you think about the world, while behavior is what you do with that information. Behavioral alpha may be created by less frequent trading, less inopportune trading and infrequent return chasing. Young funds and women and minority owned funds may be fertile grounds for behavioral alpha.

Luck/Chance – It is difficult to admit that sometimes what we think is alpha is really just luck or chance at work. For example, in the late 1990’s when I first began researching hedge funds, there were a number of funds that had no real shorting skills but that, at the time at least, didn’t need those skills. The rising tide of the bull market lifted all ships, so to speak. However, when the markets broke during the tech wreck, it was quickly evident which hedge fund managers were wearing no clothes, luckily figuratively and not literally. This is why it’s always critical to ascertain whether a manager is riding a good strategy or a good market.

It’s time to look a little further than the 500 largest hedge funds to find excess returns. Finding alpha isn’t always easy, but the 2014 pledge class of Mi Alpha Pi is looking forward to welcoming you. 

Investing and The Law of Unintended Consequences

In Nashville, we have a weekly paper called “The Contributor” that is sold exclusively by badged homeless individuals on various street corners around town. The paper costs $2, and I make it a point to stop and buy one once a week or so. Now before the bleeding heart liberal accusations start flying, let me explain. “The Contributor” contains some of the world’s best advice couched in its “Hoboscope,” written by one Mr. Mysterio. It’s worth the price of admission every time.

In a recent Hoboscope, Mr. Mysterio provided the following nugget: “Assuming the worst will happen might make you cautious, but it never really makes you safe.” In investing, at least, truer words may never have been spoken.

We all know investors are motivated by fear and greed. I would postulate that our fear wins every time. Maybe it’s the fear of losing money. Perhaps it’s the fear of not keeping up with investing peers. It could be the fear of headline risk, or of paying “too much” for an investment. But our fears feed our investment decision-making, creating cautious investors who somehow remain far from safe.

Take me, for example. For the last several months I have been sniffing disaster on the markets like a dog with his nose out the car window. Having lived through LTCM, the tech wreck and 2008 as a professional investor, my thoughts often fly to all the bad things that can happen to my little nest egg. At the moment, and for much of recent history, I’m primarily in cash. In the meantime, however, I’ve missed significant market gains, which compromises both my current and future earnings. I’m certainly cautious, and I’ve avoided my worst-case scenario, but I haven’t made my financial situation significantly safer due to that particular trade.

Look at the institutional investor community. One of their greatest fears is that of headline risk a la the Art Institute of Chicago and Integral Investments. As a result, many choose to pile their assets into a very small number of large and established managers (the 500 or so that contain 90% plus of the hedge fund AUM).  Studies, including my own from 2006-2011, Preqin and eVestment, have shown that smaller funds tend to outperform their largest counterparts cumulatively and across more time periods, and that new funds have outperformed cumulatively and across all time periods.  However, just like no one ever got fired for buying IBM, it’s unlikely you’ll be fired for investing in Bridgewater or Paulson. But does sub-optimizing returns in a world of growing liabilities truly protect us, or does it just spare us the humiliation and/or hard work of investing in or potentially being wrong about a smaller or newer fund?

And finally, think about the investors that remain all too focused on fees. Overpaying for an investment is a capital crime for a host of investors. They hope to simultaneously optimize returns by saving a few basis points and avoid the headline describing how much they paid their portfolio managers last year. Unfortunately, their fear can result in negative selection bias (only investing with lower cost funds or funds who will cut fees), going direct in an investment arena where they may not have sufficient expertise, or eschewing certain investments altogether. The illusion of safety is created, where their caution may in fact be creating its own set of risks.

Regrettably, I can’t tell you how to solve this conundrum. Let’s face it: I’m no Mr. Mysterio. I can only advise that when we think through our worst case investment scenario, we focus on all of the factors that need to be in place to make us truly “safe.” Not just on the one or two problems that keep us up at night.