Like many folks these days, I rely on the interwebs to discover how to do certain things. Change the battery in my home alarm system? YouTube. Learn how to create a smokey eye? Instagram. Grill a turkey for Thanksgiving dinner? Jimmy-D’s Thanksgiving Turkey BBQ 2010.
Of course, these efforts are met with varying degrees of success. My recent foray into alarm-battery changing resulted in an unplanned visit by Nashville’s finest. All attempts at a smokey eye were followed by offers of domestic abuse support and/or temporary blindness. In fact, only the turkey grilling turned out the way I’d hoped, since the meal was both edible and guests remained salmonella-free.
It’s not just me. Lots of people think that mimicry is pretty easy. In fact, there are whole websites and videos devoted to cake disasters (can you even tell that’s supposed to be a Mallard Duck Birthday Cake I baked for a hunting friend of mine???) and other sites where people can post DIY fails for your enjoyment and moment of daily schadenfreude.
And of course, the investment industry can’t be immune to these sorts of shenanigans - we just aren’t that special. But in the case of investing, we usually refer to our attempts at mimicry as factors, and although we label these “smart beta,” in fact success rates can be just as varied.
Indeed, factor investing has become incredibly commonplace during my tenure in the investment industry. These days, I think I hear the words “well, couldn’t you just use the [value, quality, momentum, size, low vol, or any number of the other 300-plus] factor instead and do it for [5, 10, 20…] basis points?” in my sleep. The word “factor” has even started reverberating through my head sometimes like a Jan Brady “Marcia, Marcia, Marcia” redux.
Call me contrary, but any time an investment theory (or really any trend) is thrown around with this much impunity, it makes my Spidey senses tingle. Is it really possible that all investing can be boiled down to choosing the “right” factors and that generating returns can be so simple and cheap?
It turns out, maybe not. I read an interesting paper the other day, “Alice’s Adventures in Factorland: Three Blunders That Plague Factor Investing” (Arnott, Harvey, Kalesnik and Linnainmaa, 2019) that theorized that factor investing may actually underwhelm due to problems with data mining, crowding, trading costs, diversification and other issues that make it less than the “perfect” return generator it’s often mistaken for.
What’s more, because most factors are backtested over a long period of time (standard investment industry protocol, right?) there is a bit of smoothing that may be evidenced by the final factor-based product. In the paper, the authors highlight the performance of 14 popular factors from July 1963 to June 2018. During that period, the value factor exhibits negative correlation to the markets. So, one might believe that value is a diversifying factor in a portfolio. And it may be. Until it ain’t. “The value factor, for example, typically correlates negatively with the market. The paper actually concludes that “[d]uring the global financial crisis, however, the value factor correlated positively and significantly with the market, performing poorly as the markets tumbled and soaring as the stock markets rebounded.”
Huh. Whoda seen that coming?
I already had my suspicions about this prior to reading this paper, however, although they were admittedly less academically rigorous. These misgivings began to take root when factors became the quick answer for everything. Like a manager’s strategy? Let’s figure out the factors and do it cheaper! It’s esoteric? There’s still gotta be a factor we can use. Oooh…here’s some correlation in a single market environment – that will be perfect!
Look, I know that active management has taken it on the chin during this 150-plus month bull market. I understand that investors are increasingly price sensitive and replicating strategies on the cheap has great appeal. I even get that, at this moment in time, when a strategy may be highly correlated with a particular factor (perhaps because both are trending up), that factor investing may look too good to pass up.
But I do wonder, when the markets get tested and everything turns ass over elbows, whether we’ll be eating the perfectly grilled turkey I learned from Jimmy-D or that sad, parrot-looking mallard cake, complete with (no joke!) red velvet sponge. If you’re not at least wondering a teeny tiny bit the same thing, perhaps I need to ask Jimmy-D to host a video blog for us on the topic.
A new holiday fad for fund managers of all ages and denominations! LP On A Shelf (or ELP on a Shelf, as I call him) knows when you've been spending too much time at conferences, when you're creating pitch books that are too long, or when you're not hiring critical personnel (or skill sets) and will tell Santa not to offer you an allocation in the New Year.
Many of the fund managers I speak to remain conflicted about how best to position their diverse asset management firm. While I don’t have all the answers, perhaps I can help shed a little light on the topic for folks. Read this while you’re thinking about your capital raising battle plans for 2019. And may it help you separate who’s been naughty and nice, whose chimney you should visit and whose you should skip in the New Year.
It’s August. It’s slow. It’s what the Hitchhiker’s Guide to the Galaxy might have referred to as the “long dark teatime of the soul” when it comes to investment industry activity. The conference circuit is dead. Everyone is on vacation. There are practically tumbleweeds rolling through your office.
Yep, it’s about this time of year when you believe that everyone but you sold in May and went away.
And you’ve got the Out of Office emails to prove it.
Sure, you’re still sitting in your office, or you’re on a nice beach trying to be productive while your family cavorts and relaxes, dutifully sending out email requests for meetings, performance updates, introductory information, requests for proposals, whatever. And all you’re getting back from Darryl, John, Hall and Oates is “I am currently traveling with no/limited/sporadic access to emails/phone. If you need immediate assistance, please eff off/contact this random person. I will respond to/continue ignoring your email upon my return.”
So what’s an investment professional to do?
If you’re getting the Out of Office (OOO) treatment these days, try these handy tips for coping:
1) Assume the email you just sent is going into the virtual circular file. It ain’t never gonna be read, answered or otherwise acted upon. Even if the autoreply doesn’t go as far as this particular OOO did to spell things out for you, your chances of getting a timely response are pretty slim. So look at the date the out of office email expires and mark your calendar for one week after that date. On that day, send your email again. Do not forward, do not refer to your prior email. Send a virgin email, to be touched for the very first time, without the guilt and recrimination of a forward. Start fresh. Just like you hope the recipient is doing after a nice, relaxing holiday.
2) In investing, time is money, but it isn’t life. We’re not carrying hearts around in beer coolers, y’all. Whatever you are emailing about, chances are it can probably wait a week (or two) for a response. Even if it doesn’t feel like it to you in a particular moment. If you get an out of office response, DO NOT attempt to hunt the person down like you’re the Terminator of the email world. On a recent vacation, I had more than one recipient of my OOO decide to text me since they couldn’t reach me via email. Needless to say, given the 17-hour time difference, I was none too happy to receive communication from those individuals in the wee hours of my morning respite from work and responsibility. So, before you go to extreme lengths to contact someone who is out of the office, ask yourself how you would feel if you reached them and they were, I don’t know, at a funeral. Would your call or text be worth disturbing that particular occasion? If the answer is “no” then put down your phone and back slowly away. Otherwise the only funeral you may be going to is yours.
3) Try a little patience. Most people I know start going through their missed emails from the top down (most recent dates first), in the off chance something has resolved itself in the intervening days or moments and they can blissfully ignore all related messages. If you emailed early on in someone’s OOO timeline, give the person a few days to get back to you. See also, OOO tip one.
4) For those composing an OOO, go ahead and say you’re not checking emails. Even if you are, there’s bound to be a few you can’t or won’t deal with. Telling people you’re checking emails sporadically or that there’s a “delayed response” gives those receiving your OOO false expectations, and gives them a little more leeway to harass you while you’re grabbing some R&R (or attending a conference, or staycationing…).
5) Even if you don’t get an OOO response, if you don’t get response from someone after a week during this most humid time of the year, give folks the benefit of the doubt. There’s nothing worse than coming back to the office to find a bunch of pissy emails (“I tried you last week but didn’t hear back”) to make someone NOT want to prioritize you.
If you find you’re just too impatient to follow my Out of Office Etiquette, perhaps you need a little OOO time yourself. Economist Juliet Shor found that Americans take less vacation than the average medieval peasant, who worked around 150 days a year. So make a break from your feudal ways and chillax. You can always start stalking folks again after Labor Day.
Thank You Sir May I Have Another?!?
The first time I ever saw Kevin Bacon in a movie was the infamous and hilarious flick “Animal House.” Although he didn’t yet have the appeal of, oh say, Ren McCormick (me-ow!), he did make an impression on me in his fraternity brother days. Perhaps it was his tight-assed, ROTC-inspired declaration of “All Is Well!” during the movie’s climax that got my attention. But, more likely, it was his tighty-whities in the infamous fraternity initiation paddling scene that caught my eye. I couldn’t imagine, even at the ripe old age of 8, that a grown man would allow another man to paddle him. IN HIS UNDERWEAR. And would cheerfully, though admittedly through gritted teeth, ask for another. And another. And another.
But then again, there are a lot of things I don’t understand, even today at the ripe old age of, well, not 8 years old. For example, I don’t understand why another study showing that smaller and younger funds outperform is necessary or the results touted as surprising.
Haven’t large funds been spanked with this data enough by now for us all to cheerfully conclude that smaller, younger funds outperform their older, larger peers?
I guess not, because just two weeks ago yet another entry in the small/young fund cannon made its appearance. On April 26th, Chao Gao and Chengdong Yin (Purdue University) and Tim Haight (Loyola Marymount University), used data from the Lipper TASS and the HFR databases to prove YET AGAIN that good returns come in small and new packages.
Now, as someone who actively supports emerging and diverse (who are often also emerging) managers, I should be happy to see yet another entrant into the verifiable tsunami of studies proving that small and young funds outperform. But really, isn’t it a little bit embarrassing at this point? I mean, it’s not like we don’t have a metric crapton of research that shows small and young funds outperform already, right? But just in case there was ANY doubt left in anyone’s mind at this point, allow me to point you to the studies that may help you reach the well-documented conclusion that, when it comes to emerging managers, all is, in fact, well.
Small & Young Funds Are Killing It – A Non-Exhaustive, But Pretty Damn Complete List of Research
PerTrac studies on emerging managers, 2007-2011
eVestment studies on emerging managers 2012-2014
Mayer & Hoffman paper on emerging managers. May 2006. Also appears in the book “An Investor’s Guide to Hedge Funds”
“An Examination of Fund Age and Size and Its Impact on Hedge Fund Performance” Derivatives, Use, Trading and Regulation, February 2007
“An Examination of Fund Age and Size and Its Impact on Hedge Fund Performance,”Journal of Investing, vol. 18, no. 1, spring 2009.
“Emerging Managers: Good Buy or Good Bye?” Barclays Capital, 2011.
“Smaller Hedge Fund Managers Outperform: A Study of Nearly 3,000 Equity Long/Short Hedge Funds” AllAboutAlpha.com, February 18, 2013
“Are Investors Better Off with Small Hedge Funds in Times of Crisis?” City University London, July 14, 2015.
“Emerging Hedge Funds Outperform Established Peers” Preqin, July 2017 (multiple other years of studies also available)
“Size, Age and The Performance Life Cycle of Hedge Funds” Gao, Yin, Haight, April 26, 2018.
Want some long-only fund action? I got that, too. How about:
“Does Fund Size Erode Mutual Fund Performance? The Role of Liquidity and Organization” Chen, Hong, Huang, Kubik, December 2004
“Liquidity, Investment Style and the Relation Between Fund Size and Fund Performance” Yan, 2008.
“New Evidence on Mutual Fund Performance: A Comparison of Alternative Bootstrap Methods” Blake, Caufield, Ioannidis, Tonks, October 2015.
“On Size Effects in Separate Accounts” Evans, Rohleder, Tenesch, Wilkens, August 2017.
And how about some Private Equity findings?
“Making the Case for First Time Funds” Preqin, November 2016
“Feels Like the First Time” PitchBook, 4Q2017
As I mentioned, this is a decent representative list of studies of small and new funds across the asset management spectrum. It is not exhaustive, mostly because I’m not sure it needs to be. I mean, you can’t really be standing there decked out in your undies asking me to hit you with even more data, right? So, let’s put the kibosh on proving something we should already know and just work to bring home the Bacon by investing in funds of all shapes, sizes, ages and types, not just tried and true established managers.
I’d like to think I’m not big into snap judgements, but a recent trip to the left coast in super-glamorous coach showed me that I’m completely full of it on that front. As I sat in my window seat waiting for my fellow fliers to board, I quickly sized up each and every passenger as they came down the aisle to determine whether they were someone I wanted to share air (and an armrest) with for the next four hours.
I mentally begged for the tiny old ladies. Anyone the size of a professional athlete (save maybe a jockey) I tried to psychically hurry past my row. I mean, seriously, those coach seats aren’t wide enough for a five-foot three figure skater, let alone a member of the NFL.
In fact, I still sometimes have flashbacks to a flight a couple years back when I was marooned next to a professional bowler for five hours. He was completely lovely, for what it’s worth. He even offered me a piece of gum mid-flight. Sadly, when he pulled said gum out of his pocket, it had liquified. I guess the heat that had built up to Dante’s Inferno level between our inexorably connected hips was just too much for a pack of Juicy Fruit to take.
Yeah, just thinking about that again kind of made me throw up in my own mouth.
Anyway, after the tall but sinewy gentleman took the middle seat on my recent flight, I had plenty of time to think about investment industry stereotypes as I tried not make arm or thigh contact midflight. And since I’m often picking on managers in this blog, I decided to fixate on investors for once.
So here you go!
It’s a completely unscientific, grossly generalized profile of the five investors most money managers meet.
The Tomato Seed– As a Southern girl, I know a thing or two about tomatoes. I know that any tomato eaten before the month of July (or after the month of September) is likely to taste like a whole lot of nothing. I know that, after a certain age, I’ll be required to grow tomatoes if I want to continue living in the South. And I know that tomato seeds are slippery little buggers. Seriously, try cutting a good beefsteak tomato on a cutting board. Now try to pick up one seed on your finger. I bet it squished away from you, didn’t it? Tomato Seed Investors are the exact same way. You can try to pin them down on something (a phone call, a visit to their offices, a due diligence trip, a date for subscription docs to arrive) and you just can’t quite to get them to stick. Tomato Seeds may employ a variety of tactics to slide away… “I’m sorry I didn’t see your email.” “I’m in another city that day, try again next trip.” “Contact my assistant (she’s out for maternity leave)…” but the result is always the same.
The T-Rex- You’ve seen a T-Rex right? Not a real one, obviously, but a rendition or skeleton of one, I’m betting. You know how they have really short arms? Picture those arms trying to reach into their pockets to grab a wallet. There’s no freakin’ way, right? T-Rex Investors similarly have very short arms and very deep pockets. They may say all the right things about how great your strategy is or how they love your team and your energy. They may even go through the full due diligence dance before all is said and done. But they never actually hand you any money. T-Rex Investors are one of the trickiest to deal with in the wilds as you don’t actually know who they are until you’re at least two years in. Up until that point, you kind of have to keep being nice and going through the motions, but once you’ve met a T-Rex, you’ll always be a bit scarred by the experience and perhaps even prone to pushiness with future investors.
The Ghost– For anyone who has ever dated on Tinder, Bumble, Match or, hell, just dated period, The Ghost is a familiar figure. You meet The Ghost Investor at a conference or event. You have a great conversation. There’s terrific follow up. You have another meeting or talk shop over a lovely Merlot. And then The Ghost, well, ghosts. You send emails that fly into cyberspace, never to been seen or heard of again. You leave messages on every available phone the investor has but get no return call. You contemplate hiring a medium to see if you can raise The Ghost Investor from the dead, all to no avail. The Ghost has disappeared, likely never to be seen in more than passing again. They may appear as a brief apparition at a conference but are usually viewed in passing (as they spirit away from all the managers they’ve ghosted before) or from a distance.
The Doorknob– One of my ex-boyfriends was a doctor. He liked to tell me how his day was over dinner and more than a few gin and tonics. Some of the stories were sad, some had delightfully happy endings, and some were SSDD. The most common refrain was complaints about patients who waited until Doctor Dude’s hand was literally on the doorknob, walking out of the exam room, to tell him that something else was wrong. It could be small, like an ingrown toenail, or utterly ridiculous in a “Hey-doc-did-I-tell-you-I-faint-every-time-I-walk-up-the-stairs?” kind of way. Whatever it was, it always stopped Doctor Dude cold. He’d thought he’d reached escape velocity and then WHAMMO! There are investors who excel at The Doorknob, too. You jump through every hoop and are told, explicitly or implicitly, that a wire is imminent. Then, The Doorknob strikes. “Oh, hey…we were just wondering about the trader you fired three years ago…can you provide his contact details to us?” “Gee, we’re really close but we are actually going to need to chat with your compliance person again to get her perspective on your ERISA AUM.” “So, it’s probably nothing, but in our background check we discovered that your chief information officer has a criminal record and we’re gonna need to clear that up.” Whatever it is, it hits you in the face like a glass of ice water and it has to be dealt with before you get any moola. Makes you want a gin and tonic too, right?
The WOW– The WOW Investor (Walk On Water) is the rarest of all investors. They return calls and emails within a reasonable amount of time. Their due diligence process, however lengthy, goes exactly according to plan. They clear up issues quickly and efficiently. They understand that, in order to run a successful business, you actually need cashflow to pay talent and build infrastructure AND they don’t begrudge you making a little coin, too. They call when they have questions and potentially provide insight into how best to communicate with other investors. The WOW investor is the Holy Grail of Limited Partners. They can be confused with the T-Rex and the Ghost, at least for a period of time, but will distinguish themselves in relatively short order by, oh, writing a check or returning a call. If you are lucky enough to find a WOW Investor, you should do everything in your power to keep them happy, up to and potentially including offering them your first-born child. Your wife or husband may grumble, but then again, they’ve never had to deal with the less desirable types of investors.
As you go about your capital raising business, be on the lookout for each of these types of investors. You may not be able to ID them as quickly as I could a potential seatmate on my flight, but you’ll get better at it over time.
Last week, I almost peed in my hotel room closet.
Yeah, you read that right.
It was the middle of the night. I’d been in different hotels (interspersed with brief sojourns at home) for part of every week since the beginning of the year. And for one brief and almost disastrous moment, I simply forgot where I was. Luckily, I came to my sleep-addled senses when I tripped over one of my own shoes, placed strategically outside the closet door. But still, it was a sobering moment.
Many of us that work in the asset management industry spend a tremendous portion of our lives on the road. Money managers must travel to drum up investments, to keep current investors happy and informed, present at investment committee meetings and otherwise support their assets under management. Investors trek for diligence visits, periodic onsites, and other gatherings (trustee meetings/retreats, investment committees, etc.). And of course, there’s the ever-expanding conference circuit to keep both groups, plus a hoard of service providers, racking up craploads of frequent flyer miles. Many of which we’ll never use because we’re pretty darn happy when we actually get to spend an extended period of time at home.
Over the past ten+ years of extensive travel, I’ve developed a few coping mechanisms to manage the rigors of being almost constantly on the go. And after sharing my closet story with a few folks last week who seemed to identify with my temporary travel amnesia a little too much, I came to realize that we could all use a few hacks to make it through 2018 as productively, and sanitarily, as possible.
So here goes: Meredith’s Top Five Travel Hacks for the Investment Industry
1) File business cards in your conference name badges. After a conference is complete, I always put the cards I’ve collected into the back of my used name badge. That way, I can remember where I met someone and/or pull contact information for a specific person or company quickly.
2) Carry a spare lanyard. If you work for, well, just about anyone, chances are you’ve at one point had a company-branded lanyard. Put it in your computer bag and take it on the road. That way, when you arrive at a lanyard-free conference, or, horror of horrors, at a conference where they expect you to use safety pins to secure your nametags, you’ll be able to spare your look and your clothes while still letting people know who you are. Don’t have a company-branded lanyard laying around? Choose a key service provider and proudly rock their lanyard.
3) Put one of your business cards in the back of your namebadge while at the conference. So, lanyards are great (see above) but sometimes (nearly all the time if you’re me) those contrary contraptions spend more time making your nametag face your belly button than the person you’re talking to. To ensure that folks can always tell who you are and who you’re with, put one of your own business cards in the back of your nametag while you’re at the event. Frontward or backward, you’ll be good to go.
4) Get a good business card with a white, non-slick back. Take out your business card right now and grab a pen. Not a good pen, but a crappy conference giveaway pen with a somewhat bajiggety rollerball. Write your name on the back of your card. Can you see it? Does it smear if you rub your thumb across it? Is there room to write your entire name? If you answered “no” to any of these questions, your business card is the bane of people’s existence. How do you expect us to write notes on the back of a card that doesn’t have ample real estate, is too dark, or where the ink rubs off on our clothes or hands? Make it easy for the people at an event to connect with you later with light colored cards on decent card stock.
5) Know how to sneak in breaks. If you’re a money manager at a conference, you’re there to network. That means anything that says “break” on it in the conference program is showtime for you and your fund. If you’re an investor, your breaks are a little more sacred…if you can get out of the event for a few minutes unmolested. In other words, if you want to get a few minutes to yourself in either case, you’re going to have to plan for it. Money managers, scope out the sessions in advance and figure out one or two you can skip. Note: Do not skip sessions with anyone who has an investment in your fund, who works for your fund, or who could invest in your fund. Investors, you may have to make a break for the break a couple of minutes before a session ends to get to a “safe zone” (bathroom, hotel room, Starbucks). Obviously, you shouldn’t avoid breaks altogether (the best way to find talent is to meet talent!), but skipping out on one out of four in a day may help your sanity level a bit.
Of course, there’s always more where those came from, such as:
- Don’t ever, ever touch your face during a conference or event…with all the hand shaking, that’s the single best way to get sick.
- When going to the airport or train station after a big event, don’t talk business on your phone or with friends until you know you’re not surrounded by conference goers that you don’t recognize because they are now attired in “real people clothes.”
- And of course, always put your shoes outside the closet door.
I’m sure you have a few tips and tricks of your own, so feel free to leave them in the comments below, but if you follow these simple guidelines, you’ll likely save yourself some headaches and may make even better use of your time on the road again.
You know what I miss? David Letterman’s old Top Ten Lists. Hands down, those were my favorite part of late night TV. I know that others have stepped in to try to fill the void. Bill Maher has his “New Rules” and Jimmy Kimmel has the often-entertaining “Mean Tweets” but, to me, David Letterman will always be the original king of the recurring hilarious late night bit.
I mean, who can forget the Top Ten Things That Sound Cool When Said By Snoop Dogg? And the Top Ten Reasons Homer Simpson Should Be President. Or my all-time personal fave: Top Ten California Names.
So in honor of Letterman and out of a wealth of nostalgia that popped up unexpectedly over the weekend, I hereby offer you my own top 10 list…
Top Ten Ways To Alienate A Potential Investor
10. Spend the first 35 minutes of a call or meeting talking about your bio.
9. “I assume you’ve reviewed our pitch book in advance of this call…”
8. Inability to make polite small talk in lieu of laser-like need to focus on your investment product.
7. Interrupting conversations at conferences and/or staring from two feet away until said investor is so uncomfortable they interrupt their own conversation to acknowledge you.
6. Literally not knowing anything about the investor before you approach them.
5. Two words: Wardrobe malfunction (true stories, but better told over adult beverages than in a blog).
4. Ignoring time zones/weekends/holidays when calling.
3. Mansplaining why an investor’s reasoned conclusion is wrong.
2. Lying, and yes, this includes “gilding the lily.”
1. Saying “I’m not going to go through each slide.” And then going through each slide.
As someone who was born, raised, and has spent the majority of my life in the South, one of the things I’m required to love, besides SEC football, is Redneck Humor. From Trae Crowder, Corey Ryan Forrester, Roy Wood Jr., and Drew Morgan today to Ron White and Jeff Foxworthy a decade or so ago, I love poking fun at myself and laughing at my fellow rednecks. I can reliably drive on the backroads of Tennessee and come up with “You may be a redneck” moments every few miles, and my friends and me are up for our own hillbilly kudos when summer reliably finds us in a backyard with a baby pool and some PBR.
I even have a personal favorite “you may be a redneck joke” that makes me laugh every time I tell it:
“You may be a redneck if you think a tornado and a divorce have a lot in common – ‘cos either way, someone’s losing their trailer.”
A recent trip to the WellRED comedy show in Nashville got me thinking about all the ways in which, I as a redneck, can be defined. It also got me thinking about how we categorize and group other people, places and things in an attempt to make cosmos out of chaos.
There are few places in the investment world where there is more confusion than in the world of emerging managers. Ask two people what constitutes an emerging manager and you’re likely to get two completely different answers. Is it small funds? How small? Is it diverse funds? Ownership or fund management? Is it new funds? What’s the cut off? Does the manager need to be local? Does the manager need to be certified? What counts as a minority? Frankly, I find that emerging managers swirl in their own vortex of uncertainty.
So to help everyone out a little bit, I thought I’d use my 11+ years in the emerging and diverse manager space to create a handy-dandy checklist to determine whether or not a fund may be emerging. After all, it seemed like a great project for a winter weekend when 0.5 inches of snow has me pinned inside the house like the Southerner I am.
You Might Be An Emerging Manager If…
…you have less than $2 billion in AUM and manage long-only assets. Although this may seem reasonable on the surface, since the largest long-only fund managers may control trillions of dollars (with a “T”), it may still be a little large. In an August 2017 study by Richard B. Evans, Martin Rohleder, Hendrik Tentesch, and Marco Wilkens looked at 3,370 separate accounts (“SMAs”) managing $3,671 million and found those in the 10th percentile managed $5.38m, the 50th percentile managed $128m and the 90th percentile managed $1,470m, with a range of accounts from 3 to 15 to 305, respectively. In line with research about mutual funds, the authors found better performance in the smaller SMAs, in part due to liquidity constraints and market impact costs, but also due to increasing management complexity as the number of accounts increased. Take a look at the research if you’ve not seen it yet.
…you have less than $1 billion, and really more like <$250 million, in hedged AUM. (There are only about 700 funds with over $1 billion, so if you’ve gotten to that milestone, beating out 9,300 of your peers, I’d say you’d emerged).
…your firm is owned at least 51% by women or minorities for official certification, or has 33% women or minority ownership if you want to get a bigger crop of funds from groups that historically have had less assets with which to launch funds, and therefore may have partnered with firms or individuals that dilute the ownership structure.
…your fund is managed by women or minorities. This can be key for investors who are looking for cognitive and behavioral alpha (or differentiated networks for private asset funds), and may be more important to some than ownership status.
…the minority ownership or fund management in question is done by a U.S. citizen.
…the minority ownership is not by fungible personnel who were given ownership status simply to qualify for MBWE status (wives, daughters, back office personnel, figureheads).
…the fund is less than three years old or is a Fund I, II or III.
…the fund is not part of a mega asset management complex.
…the fund meets the above requirements and is located in the same state as the certain potential investors (Illinois, Pennsylvania, etc.)
…the fund is owned by veterans or disabled veterans.
Now, obviously there are all kinds of competing definitions out there, and there are also practical implications for investors, particularly larger ones. For example, if an institution manages billions of dollars (with a “B”), it may be difficult for them to look at the smaller end of the spectrum of emerging funds without having to assemble a massive portfolio of managers. Still, I hope these definitions may resonate with folks out there who are looking to capture some structural, cognitive and behavioral alpha. They may be a more successful investor if….
Sources: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2933546 Preqin, SBA
NB - I have nothing against crypto and quant funds, honestly, but a little variety is always nice.
It seems as if everyone has been pretty focused on Tweets, hashtags, and the general dumbing down and coarsening of communication of late. So I thought this week I'd inject a little culture into my investment blog. What if investors and fund managers could only think or talk in Haiku? The sentiments would likely remain the same, but the delivery might be much more civilized. So here you go: investor and manager haikus. Feel free to add your own in the comments section.
Seasons change, my phone
Keeps ringing. The same number
Calls. Persistent funds.
Not the best idea
To use diligence checklist
On the kids’ playdates.
Must I disclose this
Doughnut to compliance or
Can I eat it all?
Can’t wait to discuss
Fees with the trustees at our
Next board meeting. Yay.
I don’t want to shake
Hands while grabbing paper towels
In the bathroom. Gross.
Fall becomes Winter,
And I find myself stuck in
Performance is great!
This sector is hot! So why
Don’t people subscribe?
Do you want info
On my investment fund? No?
High net worth peeps, endowments.
Lather, Rinse, repeat.
It’s our process and people!
Oh. You’ve heard that one.
I seem to provide this information to newer and smaller funds often, so I thought I'd cut down on repetition and provide all you gorgeous small, new, and diverse fund managers with a short guide to early stage investors. Now start smiling and dialing!
State Plans To Prioritize
Arizona - Has made at least one investment in a large 'emerging' manager.
Arkansas - Teachers Retirement System reportedly tabled the program in 2008 but 2011 document shows active investments in MWBE managers.
California - Looks for EM's based on size and tenure but prohibited by Prop 209 from looking at minority status or gender.
Colorado - Colorado PERA added an "external manager portal" in 2016 to make "it easier for us to include appropriate emerging managers when the right investment opportunities develop."
Connecticut - Based on size, minority status or gender. Awarded mandate in 2014 to Grosvenor, Morgan Stanley and Appomattox.
Florida - Looks at emerging managers on equal footing with other managers.
Georgia - Invest Georgia has $100 million to work with venture capital and private equity firms in the state. There is an emphasis on emerging managers and emerging funds per press reports.
Illinois - Perhaps the most active emerging manager state, based on gender, minority status and location.
Indiana - Based on size, minority status, or gender.
Kentucky - Reported $75 million allocation at one time.
Maine - Has made at least one investment in a large 'emerging' manager.
Maryland - Very active jurisdiction with details available online for gender and minority status manager information.
Massachusetts- Includes size, minority status or gender.
Michigan - $300 million program.
Missouri - Status based on size.
Minnesota - Past investments in emerging managers.
New Jersey - Status based on size.
New York - Status based on size, minority status or gender. $1 billion mandate in 2014. $200 million seed mandate in 2014.
North Carolina - Status based on size and HUB (minority and women owned) status.
Ohio - Status based on size, minority status or gender.
Oregon - Emerging manager program in place.
Pennsylvania - Status based on size with preference for minority or women run funds.
Rhode Island - Plan in place from 1995.
South Carolina - Status based on size.
Texas - Actively engaged with emerging managers. Status based on size, minority status or gender.
Virginia - Status based on size, minority status or gender.
Washington - Has issued prior emerging manager RFPs.
Oh, and if you reproduce this list, be sure to cite MJ Alts. Thanks y'all!
Seed Programs to Explore
Music to Groove To While Dialing for Dollars
Anyone who has spent any time talking to me or reading my blogs knows I love a good movie. Although I don’t see as many as I’d like these days, I love how a film can transport you, inspire you, create emotion and just generally entertain. I even use the love of a particular film as a kind of odd litmus test in friendship, business and dating situations. Did you adore Forrest Gump? Yeah, that makes me seriously question your judgment.
But some movies stand out more than others in the MJ Pantheon of Favorite Flicks. Star Wars (the original trilogy, natch), Shawshank Redemption, Argo, Bridesmaids, The Blind Side (don’t judge me), The Wolf of Wall Street, The Princess Bride, 50/50, Raiders of the Lost Ark, Rudy, Love Actually, Aliens, The Terminator (1 & 2), Die Hard and Pride & Prejudice (the 2005 version) are just a few of my all-time faves.
And of course, there’s Bull Durham. Though I’m not a huge fan of baseball (too slow, lots of spitting, often hot), I loved that movie when I first saw it at the ripe old age of 18. It was my first sophisticated on-screen romance, which had theretofore been populated by teen sex films (e.g. Porky’s), John Hughes offerings (Pretty in Pink, Sixteen Candles) and saccharine Disney scripts.
When Kevin Costner’s Crash Davis gave his epic speech during Annie Savoy’s, ahem “tryout” between Crash and Nuke LaLoosh (Tim Robbins), Susan Sarandon wasn’t the only one who sighed “Oh my…”
In case you haven’t seen Bull Durham since it’s original 1988 release (sacrilege!), here’s the scene in question. (And you may not remember this, but it is officially NSFW.)
Since we’re nearing the end of summer, I decided to watch my one and only cinematic homage to baseball over the long Labor Day weekend. It got me thinking about what I believe in when it comes to life and investing, and it wasn’t long before I was on an epic, Crash Davis-esque rant.
“I believe in manager skill. That checkbox due diligence only works if you also have a high EQ for evaluating people. That generalists and specialists should work together to combine the best aspects of myopia and a more holistic, 30,000-foot view. I believe that people who call themselves long-term investors, but who regularly redeem in less than 24 months, are full of crap. I believe that managers who say they can’t find diverse job candidates either exist in ridiculously insulated bubbles or have no imagination. I believe that having less than 10% of hedge funds, mutual funds, venture capital and private equity funds managed by women – who comprise 50% of the population – means we’re missing out on some amazing talent. I believe if all investment managers and all investors agreed to always interview a diverse candidate for jobs/fund searches, it would go a long way towards adding cognitive and behavioral diversity to the industry.
“I believe in downside deviation, maximum drawdowns and time to recovery. I think standard deviation is silly. I believe most investors don’t worry about upside volatility, but that out-of-character positive returns should trigger a monitoring phone call as fast as a losing month. I believe in macro funds, commodity trading advisors and short selling strategies, and that investors should consider these strategies before the proverbial shit hits the investing fan. I think hedging with index options isn’t real hedging, and that taking 8 to 12 months to complete due diligence is like wanting to get pregnant without risking actual sex.
“I think investment conferences should improve the quality of their cocktail party wine. That you should NEVER order the vegetarian option for lunch at an event unless you have a desire to eat something that looks like road kill. I believe in polite but persistent marketing. I think that if you focus on your expertise instead of a sale, you’ll amass greater assets under management (AUM). I believe you should always check time zones before calling a prospect or client, and that texting is NSFP (Not Suitable For Prospects).
“I believe in differentiated networks, niche strategies and cognitive alpha. I believe in gut feelings and spidey senses about people, markets, and investments. I believe in contrarians, and in sticking to your investment guns, as long as you periodically re-visit your thesis to ensure you’re not just stubborn. I believe going to cash takes testicular fortitude. I believe getting back into the market does, too. I believe in good business cards, firm handshakes and not approaching prospects in the bathroom.
“I believe that those funds that don’t get into responsible investing/ESG now will be licking AUM wounds in years to come. I believe that all investment managers make mistakes, and that admitting mistakes and ensuring that they don’t happen again is a mark in a manager’s favor. I believe in strategy continuity, but not necessarily in strategy drift. And that past performance isn’t indicative of future results, but it beats knowing nothing about how strategy translates into returns.
"I believe that most meetings could be emails, and those that cannot should be limited to one hour, tops. Oh, and any meeting that goes longer than one hour should involve snacks.
"Finally, I believe in small funds. New funds. Large funds. Old funds. Women run funds. Minority run funds. White guy run funds. Bread and butter funds. Niche funds. Liquid funds. Illiquid funds. And contrarian funds. I believe there is manager talent and fund utility in all types of funds, and that only by looking at the full menu can investor's hope to have a balanced portfolio meal."
So get back to work all. I hope you enjoyed my little investment rant…pith in the wind if you will. Maybe it will get you thinking about YOUR investment beliefs as we ramp back up into what I think could be a certifiably crazy fall market. Oh, and if you have an investment belief or rant of your own (or a good movie suggestions), feel free to sound off in the comments below.
Last August, I took my blog readers on a brief tour of my even briefer online dating struggles in an effort to prove that the behavioral bias WYSIATI (“what you see is all there is”) strikes indiscriminately, whether you’re a hedge fund investor or a hapless single gal. In case you missed that treasure trove of self-deprecation and BiFi, you can revisit it at http://www.aboutmjones.com/mjblog/2016/8/16/thank-god-what-you-see-isnt-all-there-is.
Since then, with the help of meditation, more than a few margaritas and some PTSD therapy, I have managed to put my online dating adventures behind me.
At least until this week, when I suddenly had an Apocalypse Now style flashback courtesy of an overly persistent investment marketer.
You see, during the roughly six weeks that I looked for love in the wrong online places, I attracted only three types of men: those who liked to hunt and kill things for sport (with pictures), those that liked to dress up and reenact the Civil War (also with pictures) and those that were old enough to be my dad. I won’t lie, sometimes I was lucky enough to find all three in one stunning candidate, but mostly they came in one flavor or another.
Surprisingly, the hunters weren’t the most persistent. Nor were the Civil War reenactors, who were, after all, really used to losing by now. Nope, it was the Very Old Dudes (VOD) that were the absolute worst when it came to tenacity.
The encounters were remarkably similar. I’d get a message that announced, usually without preamble, that
“I know you think I’m too old for you but you’re wrong. Love VOD”
After verifying that said gentleman had been eligible for AARP for roughly half of my not-insignificant lifespan, I would click ignore and move on. Inevitably, I would get a second email.
“I’m still not too old for you. XOXO VOD”
Why yes, sir, in fact you are. Delete.
And finally –
“You should know that everyone thinks I’m very young for my age. #VOD”
After I deleted my Match.com account, I rested comfortably in the knowledge that I could avoid more of these types of sales pitches in the future. Until last week. When an investment sales rep used the exact same shtick.
“Hi! I got your name from [the Match.com of investors, evidently]. You don’t know me, but I thought you might be interested in this investing opportunity that is completely out of left field.”
I was traveling so I ignored the email for a few days, only to get a voice mail.
“Oh hi! I sent you an email about this very random investment opportunity a few days ago. Call me back so we can chat about it.”
Because I generally try to respond to all investment inquiries, save those from Nigerian princes, I reviewed the material (briefly) and emailed the gentleman back to politely let him know it wasn’t for me. His response?
“May I ask why you’re not interested? It’s a great opportunity.”
Ugh, I thought, this is what I get for being nice. I wrote back a two-sentence email about why I wasn’t interested.
“I’m sorry, but I don’t have a positive forward view on this sector and I am a fund investor not a direct investor, generally speaking. Good luck again with your efforts.”
Of course, I thought that was that. But I was wrong.
What came next was a flurry of information about why my view of the investment opportunity was wrong, any doubts I had about the viability of the sector going forward were likewise incorrect, and how everyone thought this was a great investment opportunity.
My response? Well, I didn’t write one, because at that point I just blocked said marketer, but seriously?!? Does that sales pitch ever work? Do you get anywhere with people by telling them they’re wrong, deluded or just plain silly to not think the same way you do? Oh, and if everyone thinks it’s a great investment, why do you need to badger me, Sparky?
You may think this particular sales pitch is unique, but it happens more often than you realize. I probably have at least two or three conversations with fund marketers along these lines each year, and a larger number that are more subtle, but essentially from the same playbook. Yep, it’s a veritable treasure trove of email exchanges, phone calls or meetings where someone I don’t know’s passion for the investment strategy and certainty of its success is supposed to overcome any logical objection or lack of interest on my part.
It. Never. Works.
There has never been a moment when, on the spur of the moment, I’ve exclaimed “Gee willikers! You’re so right! How could I not have seen how wonderful this opportunity is before now! You’re so smart and patient (not to mention handsome – Oops! that’s online dating world flashback again…) to take time to school me on this. Let me send you a wire RIGHT NOW.”
This is not to say I’ve never changed my mind about a fund, but it has literally never been a “Road to Damascus” moment. There is often a catalyst or a period of prolonged and thoughtful study/review that leads me to reverse course.
In fact, the more someone discounts a reasoned opinion, the more intractable I become. And it sometimes, as in the case last week, can even lead to the capital raising penalty box – aka my junk mail folder.
So to all you fund marketers out there, and managers who pull marketing double-duty, take a moment to think through your last several pitches. How did you handle questions, objections and strategy pushback? Did you slow your roll or attempt to “sell” the idea anyway? If you pushed for the sale, you may find yourself without a date to the AUM dance. Everyone wants to know that they’re heard. By not picking up what an investor is putting down, you’re telling them, either in as many words or more subtly, that what they think doesn’t count - only what you think matters. Taking a step back, and a more educational and collegial tone, may take longer, but it can yield more fruit in the end.
And fund managers, to the extent that you rely on others to do your capital raising and marketing, take a moment every now and again to listen to your marketer’s pitch. Make sure it’s how you want your fund and your personal brand represented, so your personal assets don’t get too lonely in your fund.