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
Last week’s post on the softer side of investing garnered a question from an intrepid reader:
Just how does a manager go about building trust and a personal relationship with investors and prospects?
Excellent question, and since I regularly offer unsolicited advice on how to further capital raising efforts, one on which I am more than happy to opine. So with very little ado, here are MJ’s Top Ten Ways To Build Better Relationships With Investors and Prospects. While this list isn’t quite as funny as the Top 10 Bad Names for Businesses (http://www.ultimatetop10s.com/top-10-bad-names-businesses/), it may just save you from closing your fund to become the next franchisee for this business.
Top Ten Ways To Build Better Relationships With Investors and Prospects
I realized I was getting a bit long in the investment industry tooth the other day when I actually started a sentence with “Back in my day…” In fact, all I needed was a cane and the ability to shoo kids out of my front yard for a full flashback to the crotchety down-the-street neighbor from my youth.
What aroused this fit of curmudgeonly angst, you may ask? Well, sad to say it was a pitch book.
Many of you know that I spend an inordinate amount of time looking at pitch books. I’ve seen long ones and short ones. Blue, black and green ones. Stapled, bound, slick, fancy or plain, I’ve seen so many pitch books my retinas have paper cuts.
Recently, while looking through a stack of pitch books I noticed a disturbing trend.
Title Page
*flip*
Tiny Print Disclaimers No One Reads
*flip*
Table of Contents
*flip*
Fund Highlights
*flip*
Performance
*flip*
Investment Process
*flip*
Portfolio Construction…
*flip*
Wait. Something is missing. *flip* *flip* *flip*
Hmmmm…*flip* *flip* *flip* *flip*
Oh wait….HERE it is…Firm and Manager Information. At the end? You betcha. Sometimes it was even in the appendix.
Look, don’t get me wrong - I recognize that investors are laser focused on returns. With all the underfunding and under-saving and underperforming, I get it. Returns matter. But they aren’t (or shouldn’t be) the only factor in the investment decision-making process.
Back in my day…
When I started investing in the late 1990s, we had a slightly different modus operandi for choosing hedge funds. Sure, we screened for alternative investment options based on returns (where available), but we didn’t get a lot of elaborate pitch books. Often all we got was a PPM, a conversation and, if we were lucky, some sort of beverage during our meeting. There wasn’t necessarily a formal “pitch” and the meetings generally entailed a lot of Q&A. My write-ups for the rest of the investment committee weren’t limited to number of positions, leverage, and service providers (although those were certainly important), but also included my general impressions of the manager and staff.
After all, we were placing money in a fund, but we were actually entrusting it to a person. And while it’s nice to think about percent returns, alpha, beta and the whole carful of Greeks, the decision of whether we were interested in a fund couldn’t be isolated from how we felt about the people to whom wrote that big freakin’ check. (Ok, it was a wire, I’m not THAT old).
Unfortunately, I think relationships and trust can get lost in DDQs, tear sheets, check boxes and stress tests, and the proof is in the pitch book pudding. Managers are eschewing bios, org charts, firm details and even grim, blank wall mug shots for pages and pages of data.
And even though my first question has always been “can this person manage money?” it has always been followed by “and can I trust them to do so?”
Think of it this way, if you trust your fund managers you sleep better at night. Combined with robust operational controls, you don’t worry that the manager may be running off to Key West to follow Jimmy Buffet with your money and a Coral Reefer tee-shirt. You also communicate better. Chances are the fund manager will engage with you more, and in a more open fashion. Simply put, the relationship and trust you mutually establish makes it easier to keep your mind on your money and your money on your fund managers’ mind. And of course, volatility is easier to stomach. In times of market or strategy volatility, you’re less likely to second guess or panic. If you trust the manager is executing the strategy you hired them to do, and you believe the market opportunity continues to exist, you can handle a loss.
If you think the manager is a lunatic, an a-hole, a loose cannon or in any way resembles Leonardo Dicaprio from Wolf of Wall Street in any way, none of that is possible.
Now, don’t get me wrong – I am not anti-research. Anyone who knows me (or even knows of me) understands that I let my Geek Flag fly. I also am familiar with the growing body of research that shows we have a tendency to make bad decisions when we rely only on our intuition. I’m also not anti-pitch book – I think a great pitch book helps before, during and after a meeting. But I do think we could all use a little reminder that, at the end of the day, we’re investing in people, and those people can ultimately make or break our investment experience.
So managers, put on a clean tie and go stand in front of your conference room wall, get your school picture taken and put it, and information about you and your staff, in your pitch book BEFORE you go too far down the strategy rabbit hole. And investors, look up from the checklist from time to time and think about whether you like, trust and can talk to your fund manager – you’ll both be glad you did.
I took the 4th of July weekend off to experience some fireworks and generally laze about celebrating the birth of our country. In lieu of a fresh blog this week, and if you find yourself missing your weekly dose of snarky research, I invite you to watch the full Hedge Fund Truth Video Blog Series.
If you're curious about the truth behind hedge fund failures, correlations and performance, what it's like to start a hedge fund, why all hedge fund managers are crooks (Hint: they aren't), or why there's no one-size-fits-all option in hedge fund fees, or if you just want to enjoy my southern drawl for a bit, you can spend a good 35 minutes watching one of the seven, short Hedge Fund Truth videos below.
See y'all next week!
Thinking about a hedge fund investment? Concerned about high fees? Before you request a fee reduction, consider that there isn't a "one size fits all" approach to fee structures. Fee reductions for smaller funds may introduce significant business risks and create counterproductive incentives. Fee reductions for larger funds may be desirable and more sustainable, but are also likely to be in shorter supply and may create negative selection bias. In short, investors AND managers should weigh the costs and benefits of slashing fees before they get themselves into an investing pickle.
For those of you that were fans of the movie Swingers you may remember this infamous scene:
“[It's 2:32am, and Mike decides to call Nikki, a girl he met just a few hours ago][Nikki's machine picks up: Hi, this is Nikki. Leave a message]
MIKE: Hi, uh, Nikki, this is Mike. I met you at the, um, at the Dresden tonight. I just called to say that I had a great time... and you should call me tomorrow, or in two days, whatever. Anyway, my number is 213-555-4679 -
[the machine beeps. Mike calls back, the machine picks up]
MIKE Hi, Nikki, this is Mike again. I just called cuz it sounded like your machine might've cut me off when I, before I finished leaving my number. Anyway, uh, and, y'know, and also, sorry to call so late, but you were still at the Dresden when I left so I knew I'd get your machine. Anyhow, uh, my number's 21 -
[the machine beeps. Mike calls back; the machine picks up again]
MIKE: 213-555-4679. That's it. I just wanna leave my number. I didn't want you to think I was weird or desperate, or... we should just hang out and see where it goes cuz it's nice and, y'know, no expectations. Ok? Thanks a lot. Bye bye.
[a few more calls. Mike walks away from the phone... then walks back and calls again; once again, the machine picks up]
NIKKI: [picks up] Mike?
MIKE: [very cheerful] Nikki? Great! Did you just walk in or were you listening all along?
NIKKI: Don't ever call me again.
[hangs up]”
Yeah, communicating with potential investors can feel a bit like that.
Lionsgate Entertainment
In fact, a few years ago I was speaking with an investor friend in Switzerland about manager communication. I asked him how much he liked to hear from his current managers and potential investments and, as was his wont, he laconically answered “Enough.” When I pressed him a bit further, he provided a story to illustrate his point.
“There is a manager that I hear from every day it seems. Every time I open the mail or get an email or answer the phone, I know it must be them. Finally, I started marking ‘Deceased’ on everything they sent and sending it back. Eventually the communication stopped.”
Seriously, when you have to fake your own death to escape an aggressive fund marketer, they’ve probably gone just a HAIR too far, donchathink?
All kidding aside, communication (how much and how often) is a serious question, and one that I get a lot from fund managers, particularly those frustrated with a lack of progress from potential investors.
While some managers react to slow moving capital-raising cycles by reducing or ceasing all communication (bad idea!), others move too far in the other direction, potentially killing (hopefully just figuratively) their prospects with emails, letters, calls, etc. But there is a happy medium for investor communication if you follow these simple guidelines.
Early communication – In the earliest days, just after you’ve met a new potential investor, your goals for communication are simple:
Your only goal at this stage is to see if you can move the ball forward to get to a meeting or a follow up meeting. Think of it like dating. Just not like Swingers dating. You always want to try to move the ball down the field, with the realization that being overzealous is more likely to get you slobberknockered than a touchdown.
Ongoing communication – After you have established a dialog with a potential investor, you should have realized (read: ASKED) what that investor wishes to receive on an ongoing basis. You should continue sending that. In perpetuity. Unless they ask you to stop, or they literally or figuratively die. Think about how much communication that an investor receives from the 10,000 hedge funds, 2,209 private equity funds, and 200+ venture capital funds that are actively fundraising. If your fund falls completely off the radar, how likely is it than an investor will think about you down the line? Yeah, them ain’t good odds. Your ongoing communication should consist of a combination of the following:
In addition, it is a good idea to establish an appropriate time to call during your meetings. For example, after the initial or follow up meeting, ask specifically when you should follow up via phone. And then do it – no ifs, ands or buts. Even if performance isn’t great at the moment. Even if you feel you’ve now got bigger fish to fry. Make the call. And during that call, make an appointment for another call. And so on and so on and so on.
The trick here is to keep the fund in front of a potential investor without being in their face. And to do that, you MUST ask questions and you must be prepared to hear that another call and/or meeting may not make sense at the moment. Take cues from potential investors. Trust me, they’ll appreciate you for it.
During Due Diligence – If you are lucky enough to make it to the due diligence stage, I would suggest preparing a basic package of materials that you can send to expedite the process and demonstrate a high level of professionalism.
After The Investment – After an investor makes an investment in your fund you should stay focused on your communication strategies. Ideally, you should agree with the investor BEFORE THE WIRE ARRIVES what they wish to see (and what you can provide) on an ongoing basis. This will help avoid problems in the future. You can earn bonus points by including any ODD personnel on materials related to operational due diligence, since they don’t always get shared between IDD and ODD departments.
Also, make sure you pick up the phone when performance is particularly good OR particularly bad. Many managers will call when performance is bad for advance “damage control,” but only calling when performance is bad creates a negative Pavlovian response to caller ID. Don’t be the fund people dread hearing from.
Hopefully these guidelines will help as you navigate the fundraising cycle. And if not, hey, Swingers quote.
Sources: IMDB.com, CNBC, NVCA
As my Facebook feed fills up with graduation photos this year, I’ve become a bit nostalgic for my own graduations roughly 22 and 26 years ago. (Eeek!) Chalk it up to getting older, but even my somewhat angst-ridden, John Hughes high school years are starting to look a little rosier in the rearview mirror. And so y’all can re-live those magic, AquaNet years with me, I dug up a little video footage from my 1989 high school graduation.
(c) Meredith Jones
Yes, that’s really me. And no, I didn’t know a damn thing.
I’ve been doing a lot of publicity for my book Women of The Street, and interviewers almost inevitably ask the question: “What advice do you have for women starting out in investing today?” And as I struggle to offer some morsel of wisdom, I have to wonder, knowing what I know now, what advice would I offer that big-haired girl in the blue cap & gown?
My best piece of advice to my young self is this: “Own what you know.” I don’t know everything. I’m painfully aware that that there are literally billions of people on the planet that know things I do not know and likely will never know. But as I embarked on my career in finance, and even well into my second decade in the industry, I was hesitant to be confident in what I did know and the skills I did have. I worried about being “found out.” I thought about puking into the potted palms onstage at every speaking engagement. I did not accept that maybe I knew a few things, too. Looking back, I would definitely give my younger self a dose of confidence, along with some better hair products.
Being a researcher, I decided to pose the same question to a group of women in investments in order to get more good advice for the future women of finance. I figured these money managers, marketers, service providers, investors and other industry insiders could definitely shed additional light on the topic. Their advice broadly fell into the following categories: Investigate, Take Risks, Communicate, & Advocate.
For those women now embarking on a career in finance, or for anyone looking for good investment industry career guidance, I encourage you to embrace their advice.
“Trust, but verify. Always evaluate with a skeptical eye. If it appears too good to be true, it probably is.” - Money Manager, Anonymous
"While I believe my liberal arts has served me well, I wish I had swapped out at least one post modern literary theory course for one on portfolio construction. My learning curve has been steep. Although there are many roles in the industry that don't involve investing, that first hand investment knowledge will open more doors." - Industry Advocate, Anonymous
“I think it’s extremely important to understand the nuances between different roles and to understand what skills and strengths contribute to success for each path, and of course, where each path can take you.” - Fund Marketer, Anonymous
“I wish I knew what types of jobs were available in investment management and what the difference was between brokers, investment bankers, RIAs and private funds. It took a long time to figure this out. If I knew investment management was filled with smart, creative, fun, quirky people I would have headed here first instead of spending 5 years on Capitol Hill thinking I would be the first woman president!” - Jody Foster, President, Symphony Consulting
"It is sometimes as important what is not said as what is said." Nancy Davis, Founder and Portfolio Manager, Quadratic Capital
“Look for opportunities to learn in every situation and assignment, no matter how mundane the task appears.” - Fund Manager, Anonymous
“Start with large companies to get great training and then think about working for yourself or at a smaller shop.” - Kelly Chesney, Co-Founder, Pluscios Management
“No matter what anyone says, risk-aversion is not a positive. We are money managers. We are meant to manage risk not avoid it. Risk management and risk aversion are not equal. You cannot make dollars with out risking dollars; this is an undeniable tenet of investing. Manage, intelligently, the risk that you take but do not fail to take it.” - Katherine Chan, Partner, Anandar Capital Management
“When you want a promotion or see the requirements for a new job, don’t wait until you can check off every last requirement to throw your hat in the ring.” - Marta Cotton, Principal, Matarin Capital Management
“I would advise someone that spending time connecting with others (call it networking or getting to know a broader base of industry folk), even at a young age, is a personally and professionally rewarding endeavor.” - Nadine Terman, Managing Member, Solstein Capital LLC
“Consider where others are coming from and what motivates them to behave the way they do. Human behavior is fascinating.” - Money Manager, Anonymous
“Keep your eye out for a mentor whom you trust and build that relationship, and build a broad and deep network.” - Donna Holmes, Business Development, Lizard Investors
“It’s also about WHO you know, not just what you know. If I had to do it over, I spend more time cultivating the right friends and less time reading.” - Lisa Sergi, Partner, Deloitte
“You have to advocate for yourself. I used to think that good work would automatically be recognized, but learned that you need to remind people of how you've contributed.” - Jalak Jobanputra, Founding Partner, Future/Perfect Ventures
“Always aim high and believe in your own abilities. There will always be others to tell you what you can’t do, so you have to tell yourself that you can.” - Heather Brilliant, CEO, Morningstar Australasia
“Lead with your brain. The unfortunate stereotype when you are young and female in this industry sometimes goes like this: cute young girl in marketing = just another pretty face = empty between the ears. Don’t let them ascribe you to that role. Wow them with your smarts. It’s the equivalent of walking up to a basketball court full of guys, grabbing that damn ball, and draining threes on their heads. Earn respect - then you can be as cute and sassy as you want because everyone will know behind all that ‘girl’ is one bad-ass brain.” - Stacy Havener, Founder, Havener Capital Partners
“Tell your boss how much you expect to earn. If a guy doing the same job as you is making more money than you are, it’s no one’s fault but your own. You are the only person who will watch out for you.” - Valerie Malter, Co-Founder, Matarin Capital Management
“Stand up for yourself and help others in the industry, your generosity will be returned to you in spades.” - Holmes
“Know that it is sometimes a very powerful and confident thing to say ‘I don’t know’.” - Outsourced CIO, Anonymous
“Don’t worry about making money. If you’re passionate about what you do and it is consistent with your skills and abilities, someone will pay you well to do it.” – Malter
“On a more humorous note, I would reiterate the two pieces of advice given to me on my first day at Goldman Sachs-Sales & Trading. (#1) Nobody likes a whiner. (#2) Don’t get your meat where you get your bread. Those two rules still are valid 20 years later.” - Fund Manager, Anonymous
“Make sure you pick a supportive life partner” – Holmes or as Malter said: “If you want to have a career and a family, then deciding on the person that you marry will be the single most important decision you will ever make.”
“Don't co-mingle your money when you marry. Keep all monies separate and divide up expenses rather than combine income.” - April Rudin, Founder, The Rudin Group
"Your father will love you whatever you decide to do." - Consultant, Anonymous
“Be nice to the assistants of the people you are trying to call on.” - Cotton
“A career path is not a straight line - seek to grow with every move.” – Chesney
“Don’t sweat that you didn’t go to the ‘right’ school or that you don’t have the ‘right’ degree. I’m an English major from Western Connecticut State University. Today, that makes me incredibly proud to say. In my early days in the industry, as peers said Harvard, Yale, Finance, Economics, I felt like I was at the wrong party. Turns out that writing and story-telling are kind of important in marketing. Also turns out that hard work and grit really do pay off. To that younger self I would say, ‘Get off the wall, flower, and dance.’” - Havener
Dance, I said. Dance!
Good luck to all graduates, and all of us still enrolled in the School of Life!
(C) MJ Alts
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.
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.
Yes, it's time for yet another blog in the Hedge Fund Truth Series. Lately, it seems that an incredible amount of ire has been directed at hedge funds, fueled by four primary beliefs about the industry. While I've blogged about each separately, I thought it would be a good idea to address all four statements in a simple, 6 minute blog to separate fact from fiction. Is hedge fund performance terrible? Do hedge fund managers work? Why are you paying more taxes than your friendly neighborhood hedge fund manager? And what's with the billion dollar salaries anyway? Oh, and I threw in a couple of hedge fund "Mean Tweets" for good measure.
Obviously, there's more to each of these topics than I could possibly fit into 6 minutes. If you want to pursue any topic further, please visit my blog archive for multiple, longer discourse on the topics.
Sources: AIMA, Washington Post, Forbes, Investopedia, Barron's
As you kick back this Memorial Day, eating BBQ and retrieving your white clothing from its long winter hibernation, take a moment to peruse past MJ Alts blogs. I'm taking the week off from blogging to enjoy the first gin and tonic of summer, eat some ribs and plant peppers in the back yard. I'll be back next week with another salty blog offering.
There's been a lot of debate over the last week, and really over the last several years, about hedge fund pay. Some discuss hedgie compensation in absolute terms while others prefer comparative stats. Without a doubt, the comparison of top hedge fund manager compensation to that kindergarten teachers has become one of the more incendiary debates, but is it really a relevant or useful comparison? Are hedgies the only group that eclipse K-teachers in pay? We already know the answer is "no", but let's take a moment to look at the facts in this week's infographic blog.
(c) 2015 MJ Alternative Investment Research
Last week, a headline in the International Business Times grabbed my attention. It was entitled “Utah Public Pension Fund Audit Calls for Reconsidering Hedge Fund Investments.” In case the headline wasn’t unambiguous enough for you, it was basically yet another article talking about how hedge funds have underperformed and, well, “off with their heads!”
A recent independent audit of Utah’s $32 billion plan evidently revealed the following:
That’s it, Utah. We’re canceling Christmas.
Seriously, as we look back over the past 10 years, it is perhaps easy to be smug about the money one could have made. After all, it’s easy to predict the future now that you’ve already lived it. It may also be impossible to not think of the massive coulda shoulda woulda money left on the table by not going all in long the S&P 500 on March 9, 2009. After all, in the five years after the 2008 market debacle the S&P 500 has generated an eye-popping 17.94% annual return.
But after the latest bull market run, it’s important to remember that one can only make decisions based on the information available at the time. We don’t have a crystal ball, and the one in the rearview mirror doesn’t count. While one can generally state that the markets will make gains over time (the S&P 500 does generate 10-year gains over five percent 84% of the time, after all), it’s nearly impossible for anyone to say when those gains may come or how much one stands to profit.
Just for grins and giggles, let’s take a moment and enter the MJ WayBack Machine to travel back to 2004. I’ll even hum Outkast’s “Hey Ya!” to get you in the appropriate mood.
That’s not a pretty picture. In fact, based only on our recent experience, it is probably pretty easy to forget that two of the S&P 500’s only four losing 10-year periods just ended in 2008 and 2009. That’s right, fellow MJ Waybackers, it ain’t been that long ago since we saw a decade end in losses. And that’s exactly what Utah was living through in 2004.
In light of that particular scenario, does it seem THAT unusual that Utah’s investment pension staff might have thought a shift away from equities into hedged vehicles could have been, in fact, a good idea?
And that gamble initially paid off. According to the audit, the pension’s hedge fund positions offered protection against 2008’s market losses. Had the 2004 stock-heavy allocation still been in place at that time, the Utah’s pension would have lost an additional $436 million.
In fact, I’m betting the 2009 memo read quite a bit differently than the most recent audit, but I doubt many would take the other side of that trade.
However, in the wake of 2008’s losses, we’ve seen the S&P 500 generate almost historic gains. In fact, only 3 five-year periods eclipse the recent post-crisis 5-year annual returns: the five years following 1981 when the S&P 500 gained 19.87% (annualized); the period following 1953’s loss, the S&P 500 generated 5-year annualized gains of 22.30%; and after the Great Depression’s 1931 loss of -43.34%, the S&P 500 went on to gain 22.47% over the next five years.
So, yes, we’ve seen this "incredible gains after losses" movie three times before. But we’ve been to the theatre expecting to see this movie a whopping 24 times. And yes, the market gains have been almost unbeatable lately, but they also aren’t necessarily the norm.
And also consider this. The S&P 500 is an asset-weighted index. Apple (APL) makes up 4% of the index, and it was up roughly 63% over the last 12 months. That one stock is one of the only things that prevented a 1Q2015 S&P 500 loss. Eight of its other top 10 holdings were in the red. My point? This bull market could turn on a dime.
But I digress.
What I think we’re seeing with Utah (and a host of other investors, individual and institutional) is a classic case of budding FOMO. And the Fear of Missing Out is not generally a good investment strategy.
At the end of the day, did Utah (and any other investor who finds themselves in a similar position) make reasonable decisions based on the information they had at the time? Sure. Are others who jumped all in to the market rally now having a more rewarding experience than they are? You bet. Could the resultant FOMO potentially set investors up to become less sensitive to risk in their haste to “keep up”? Yup. Could that strategy eventually bite them in the ass? Uh yeah. And I’ll bet that will make for an interesting memo, too.
Sources: NovelInvestor.com, International Business Times, AdviceIQ.com
Given that one of the hedge fund industry's largest events takes place this week (SALT), that the Sohn 2015 event featured an emerging manager session and that it's just capital raising season in general, I thought it might be appropriate to share a little unsolicited fund marketing advice in this week's blog.
All too often, I hear about breakdowns in fund marketer/fund management relations. Fund management becomes disenchanted with how the asset raising process is going (read: slowly). Fund marketing feels pressured to raise assets for a fund that isn't performing well (read: poorly). Fund management feels that they (their three year old child, their neighbor's teenager or the guy on the street corner) could do a better job of bringing in capital. Fund marketing feels unappreciated (duped or downright angry) when bonus time rolls around.
It doesn't have to be this way.
To help avoid these common problems, I've put together a Declaration of Fin-Dependence. It's always important to remember that capital raising is not a solo sport and, even though I've seen it come to this, it ain't a contact sport either. In order to achieve capital raising success ($1 BEELION dollars, world domination, Rich List, etc.), it is critical that management and marketers both set and manage expectations carefully and execute on their common goals. The less ambiguity, the better. So, take a moment to read this historic document and then think about adding your John Hancock before you go after the Benjamins.
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.
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:
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.
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).
I am no stranger to making lame excuses. Just last week, in the throes of a bad case of the flu, I managed to justify not only the eating of strawberry pop-tarts and Top Ramen but also the viewing of at least one episode of “Friday Night Lights.” It’s nice to know that when the chips are down at my house, I turn into caricature of a trailer park redneck.
But in between bouts of coughing and episodes of Judge Judy, however, I did manage to get some work done. And perhaps it was hyper-vigilance about my own excuse making that made me particularly sensitive to the contrivances of others, but it certainly seemed like a doozy of a week for rationalizations. Particularly when it came to fund diversity in nearly every sense of the term, but particularly when it came to investing in women and/or small funds.
So without further ado (and hopefully with no further flu-induced ah-choo!), here were my two favorite pretexts from last week.
Excusa-Palooza Doozie #1 – “We want to hire diverse candidates, but we can’t find them.”
In an interview with Fortune magazine, Marc Andreessen, head of Andreessen Horowitz said that he had tried to hire a female general partner five whole times, but that “she had turned him down.”
Now c’mon, Mr. Andreessen. You can’t possible be saying that there is only one qualified female venture capital GP candidate in the entire free world? I know that women only comprise about 8-10% of current venture capital executives but unless there are only 100 total VC industry participants, that still doesn’t reduce down to one. Andreessen Horowitz has within its own confines 52% female employees, and none of them are promotable? If that’s true, you need a new head of recruiting. Or a new career development program. Or both.
But it seems that Andreessen isn’t entirely alone in casting a very narrow net when it comes to adding diversity. A late-March Reuters piece also noted that they best way to get tapped to join a board as a woman was to already be on a board. One female board member interviewed had received 18 invitations to join boards over 24 months alone.
It seems the criteria used to recruit women (and, to some extent, minority) candidates into high-level positions are perhaps a bit too restrictive. In fact, maybe this isn’t a “pipeline” problem like we’ve been led to believe. Maybe it’s instead more of a tunnel vision issue.
So, as always happy to offer unsolicited advice, let me put on my peanut gallery hat. If you genuinely want to add diversity to your investment staff, here are some good places to look:
Excusa-Palooza Doozie #2 – See?!? Investors are allocating to “small” hedge funds! In a second article guaranteed to get both my fever and my dander up, we were treated to an incredibly optimistic turn of asset flow events. It turns out that “small” hedge funds took in roughly half of capital inflows in 2014, up from 37% in 2013 per the WSJ.
Now before you break out the champagne, let me do a little clarification for you.
Hedge funds with $5 billion or more took in half of all asset flows.
Everything that wasn’t in the $5 billion club was termed “small” and was the recipient of the other half of the asset inflows.
It would have been interesting to see how that broke down between funds with $1 billion to $5 billion and everyone else. We already know from industry-watchers HFR (who provided the WSJ figures) that 89% of assets went to funds with more than $1 billion under management. We also already know that there are only 500 or so hedge funds with more than $1 billion under management. So really, when you put the pieces together, aren’t we really saying that hedge funds with $5 billion or more got 50% of the asset flows, hedge funds with $1 billion to $5 billion got 39% of the remaining asset flows, and that truly “small” and, well, "small-ish" hedge funds got 11% in asset flows?
I mean, for a hedge fund to be termed “small” wouldn’t it have to be below the industry’s median size? With only 500 hedge funds at $1 billion or more and 9,500 hedge funds below that size, it seems not only highly unlikely but also mathematically impossible that the median hedge fund size is $5 billion. Or $1 billion. In fact, the last time I calculated the median size of a hedge fund (back in June 2011 for Barclays Capital) it was - wait for it, wait for it - $181 million.
And I’m betting you already know how much in asset flows went to managers under that median figure…somewhere just slightly north of bupkis. And the day that hedge funds under $200 million get half of the asset flows, I will hula hoop on the floor of the New York Stock Exchange.
So let’s do us all a favor and stop making excuses and start making actual changes. Otherwise, we’re leaving money and progress on the table, y’all.
Sources: WSJ, HFR, BarclaysCapital, Reuters, Huffington Post
