Sleepless in Nashville

It’s that time of year again. The leaves are turning pretty colors. Kids are back in school. There is a real possibility of leaving my air-conditioned Nashville home without my glasses fogging upon hitting the practically solid wall of outdoor heat and humidity. And like any good Libra lass, I’m celebrating a birthday.

That’s right, it’s time for my annual orgy of champagne, mid-life crisis, chocolate frosting and introspection. Oh, and it’s time to check the batteries on the smoke detectors – best to make sure those suckers are good and dead before I light this many candles.

One of the things I’ve noticed in particular about this year’s “I’m old AF-palooza” is how much time I spend thinking about sleep. On any given day (and night), I’m likely to be contemplating the following questions:

1. Why can’t I fall asleep?
2. Why the hell am I awake at this hour?
3. How much longer can I sleep before my alarm goes off?
4. Why did I resist all those naps as a kid?

I even bought a nifty little device to track and rate my sleep (oh, the joy’s of being quantitatively oriented!). Every night, this glowy orb tracks how long I sleep, when I wake, how long I spend in deep sleep, air quality in my bedroom, humidity levels (in the South – HA!), noise and movement. 

To sleep, no chance to dream

Yes, I’ve learned a lot about my nocturnal habits from my sleep tracker – for example, I move around 17% less than the average user of the sleep tracking system, I’m guessing due to having two giant Siamese cats pinning me down - but the one thing I didn’t need it to tell me was that I SUCK at sleep.

I’m not sure when I went from “I can sleep 12 hours straight and easily snooze through lunch” to “If I fall asleep RIGHT NOW I can still sleep 3 hours before my flight….RIGHT NOW and I can still get 2.75 hours…1.5 hours….” but it definitely happened.

I don’t drink caffeine. I exercise. I bought a new age aromatherapy diffuser and something helpfully called “Serenity Now” to put into it. I got an air purifier, a new mattress and great sheets.

But no matter what I try, I am a terrible sleeper.

I’ve concluded that it must have something to do with stress. I do spend an inordinate amount of time thinking about life, the universe and everything, so perhaps that’s my problem.

So in honor of my 46th year on the planet, I decided to compile a list of the top 46-investment related things I worry about at night. They do say admitting the problem is the first step in solving it, after all.

In no particular order:

1. $2 trillion increase in index-tracking US based funds, which leads me to…
2. All beta-driven portfolios
3. Short-term investment memory loss (we DID just have a 10 year index loss and it only ended in 2009…)
4. “Smart” beta
5.  Mo’ Robo – the proliferation (and the dispersion of results) of robo-advisors
6. Standard deviation as a measure of risk
7. Mandatory compliance training - don’t I know not to take money from Iran and North Korea by now?
8. Spurious correlations and/or bad data
9. Whether my mom’s pension will remain solvent or whether I have a new roommate in my future
10. Politicizing investment decisions
11. Did I really just Tweet, Blog or say that at a conference?
12. Focusing on fees and not value
13. Robo-advisors + self-driving cars equals Skynet?
14. Going through compliance courses too quickly & having to do them over again
15. Short-term investment focus
16. Will I ever have to wait in line for the women’s bathroom at an investment event? Ever?
17. Average performance as a proxy for actual performance versus an understanding of opportunity and dispersion of returns
18. The slow starvation of emerging managers
19. Is my industry really as evil/greedy/stupid as it’s portrayed
20. Factor based investing – I’m reasonably smart – why don’t I get this?
21. Dwindling supply of short-sellers
22. Government regulatory requirements, institutional investment requirements and the barriers to new fund formation
23. “Chex Offenders” – financial advisors and investment managers who rip off old people (and, weirdly, athletes)
24. The vegetarian option at conference luncheons – WHAT IS THAT THING?
25. Seriously, does anyone actually read a 57-page RFP?
26. Boxes...check, style, due diligence...
27. Tell me again about how hedge fund fees are 2 & 20…
28. The markets on November 9th
29. The oak-y aftertaste of conference cocktail party bad chardonnay
30. Drawdowns – long ones mostly, but unexpected ones, too
31. Dry powder and oversubscribed funds
32. Getting everyone on the same page when it comes to ESG investing or, hell, even just the definition
33. Forward looking private equity returns (see also: Will my mom’s pension remain solvent)
34. Will my investment savvy and sarcasm one day be replaced by a robot (see also: Mo’ Robo)
35. After the election, will my future investment jobs be determined by my membership in a post-apocalyptic faction chosen by my blood type?
36. How many calories are in accountant-provided, conference giveaway tinned mints? (See also: conference chardonnay)
37. Why are financial advisors who focus on asset gathering more successful than ones that focus on investment management? #Assbackward
38. Dunning Krueger, the Endowment Effect and a whole host of ways we screw ourselves in investment decision making
39. Why divestment is almost always a bad idea
40. Active investment managers – bless their hearts – they probably aren’t sleeping any better than I am right now
41. Clone, enhanced index and replication funds – why can’t we just K.I.S.S.
42. The use of PowerPoint should be outlawed in investment presentations. Like seriously, against the actual law - a taser-able offense.
43. Will emerging markets ever emerge?
44. Investment industry diversity – why is it taking so looonnnnggg?
45. Real estate bubbles – e.g. - what happens to Nashville’s market when our hipness wears off? And is there a finite supply of skinny-jean wearing microbrew aficionados who want to open artisan mayonnaise stores that could slow demand? Note to self, ask someone in Brooklyn….
46. Did anyone even notice that hedge funds have posted gains for seven straight months?

Yep, looking at this list it’s little wonder that sleep eludes me. If anyone can help alleviate my “invest-istential” angst, I’m all ears. In the meantime, feel free to suggest essential oils, soothing teas and other avenues for getting some shuteye.

Sources and Bonus Reading: 

Asset flows to ETFs: https://www.ft.com/content/de606d3e-897b-11e6-8cb7-e7ada1d123b1

Recent HF Performance (buried) http://www.valuewalk.com/2016/10/hedge-fund-assets-flows/

HF Replication: http://abovethelaw.com/2016/10/low-cost-hedge-fund-replication-may-threaten-securities-lawyers/

Average HF Fees: http://www.opalesque.com/661691/Global_hedge_funds_slicing_fees_to_draw_investors169.html

Political Agendas & Investing: http://www.njspotlight.com/stories/16/10/03/murphy-adds-plank-to-platform-no-hedge-funds-in-pension-and-benefits-system/

Asset Gathering vs. Investment Mgmt: http://wealthmanagement.com/blog/client-focused-fas-more-profitable-investment-managers

World's Largest PE Fund: http://fortune.com/2016/10/15/private-equity-worlds-largest-softbank/  

Spurious Correlations: http://www.bloomberg.com/news/articles/2016-10-14/hedge-fund-woes-after-u-s-crackdown-don-t-surprise-sec-s-chair

Short-Term Thinking - 5 Months Does Not Track Record Make: http://www.cnbc.com/2016/10/14/venture-capitalist-chamath-palihapitiyas-hedge-fund-is-outperforming-market.html

(Thank God) What You See Isn't All There Is

My ex and I parted ways about a year ago. After taking some time to eat some ice cream, clean out my closets and get my personal feng shui back in order, I decided recently it was time to re-enter the dating scene.

Unfortunately, as someone who A) works from home and B) travels extensively, I realized that meeting men who weren’t delivering FedEx packages or patting me down in the airport was going to be a bit challenging. So I bit the bullet and did the online dating thing.

Color me PTSD’ed. 

My first day at the online ‘all-you-can-date’ buffet saw me literally innundated with emails. “Hey!” I thought. “I must still have it!.”

But then I started to actually open those emails and realized that nearly all of the men who had emailed me could be categorized into one of three buckets:

1. Men holding things they had killed;
2. Men my dad’s age and older; and
3. Curiously, Civil War re-enactors (As an aside, do folks not realize the South actually lost the Civil War? I mean, isn’t that kind of like re-enacting the Titanic sinking over and over again? Big fanfare. Long denouement. Everyone dies. But I digress…)

Ho-lee-shit.

My mind started racing.

“Well, if this is the best that’s out there for me these days, I’m going to be single forever,” I thought.

“Do you suppose they have nunneries for spiritual, not religious, former Presbyterians-quarter Jews whose favorite form of cardio is shopping and who want to endow the cloister not only with their worldly ‘dowry’ but with vast amounts of high quality hair gel???” I wondered.

Seriously. My dating life was over. Kaput. I was hopeless. Driven to salted caramel ice cream, red velvet cake, NeimanMarcus.com and re-runs of the BBC's Pride and Predjudice in an instant.

And then I realized something.

I had fallen for literally one of the oldest tricks in the mind’s playbook. Instead of considering the known unknowns (i.e. – the thousands of men online and in the physical world from whom I hadn’t received disturbing, Santa Clause-esque pictures), I had taken the known knowns and concluded that I would eventually die alone and be eaten by my cats. And don’t even get me started on the unknown unkowns in this scenario. I mean, Bridget Jones-type endings don’t just happen in the movies, right?

Daniel Kahenman explained this information processing phenomenon in his book Thinking Fast And Slow as “what you see is all there is (WYSIATI),” and I was a classic victim.

But it was somewhat comforting to me to remember that I’m not the only one that falls for this little mind game. The investment industry does it all the darn time. In fact, it’s one of the things that makes me the kinda tired about the work I do.

Don’t believe me? Think about the following areas:

Hedge Fund Returns: A classic example of WYSIATI, we all know that hedge fund returns have been positively tragic for years, right? I mean, we see the HFRI Asset Weighted Index is down -0.21% through July and that obviously means that all funds have struggled to post any kind of decent returns. Well, hold on there a minute, Sparky. What if I told you that looking at that one number was giving you a bad case of the known knowns? What about all of the other funds in the HFR database? I guess they’re underperforming, too? Nope. Even if you look at other index categories you can see instances of strong outperformance: Credit Arb – up 5.17%, Distressed – up 6.20%, Equity Hedge Energy – up 10.73%, and those are all averages. Or what about the small funds I'm always pushing on y'all? They are up 4.1% for the year to date, according to industry watcher Preqin, compared with a somewhat anemic gain of 0.54% for the "billion dollar club." In fact, these numbers are the known unknowns – the numbers we could consider, but we don’t because there’s a nice, neat single little index number for us to rely on. And then you’ve got the unknown unknowns – the funds that DON’T report to HFR and aren’t accounted for in their index. I know of funds that are up 10%, 15% even 20%+ for the year. In a universe of 10,000 funds, drawing conclusions from one bit of known known data just doesn’t cut it.

Diversity: In April 2015, Marc Andreessen famously said in an interview that “he has tried to hire an unnamed woman general partner to Andreessen Horowitz five times. Each time, she’s turned him down.” See? Even a luminary in the venture capital world can get sucked into WYSIATI. Because the “unnamed woman” was likely one of the few females Andreessen associates with in the industry, she constitutes his entire universe. She is his known known. And if you think there aren’t great women and minority candidates, funds or investment opportunities out there, the problem is likely with you. Cultivating different networks, rewriting job descriptions to attract different applicants, working with recruiters who specialize in diversity, hell, even just being more intentional about hiring and investing can reveal a wealth of candidates that can help bring cognitive and behavioral alpha to your firm.

Fund Fees: Hedge fund fees are 2 and 20. 2 and 20. 2 and 20. I hear (and read) this so much I want to vomit. Do some funds charge 2 and 20? Sure. Do some funds (read: most funds) charge less, if not in headline fees, in actual fees? Hell yes! The average fees for a hedge fund these days is about 1.55% and 18% and declining. For new fund launches, fees were remarkably stable for years, never approaching the 2 and 20 milestone on average. And what’s more, roughly 68% of funds in a Seward & Kissel study offered reduced fees for longer lock ups, while 82% of equity funds and 29% of non-equity funds offered reduced-fee founders share classes. And what about hurdle rates? An investor recently swore to me that “no hedge funds have hurdle rates.” Well, that’s just bupkis. A show of other investor hands in the room immediately dispelled that myth, proving that, while not the majority of funds, some funds do have benchmarks to beat before they take their incentive allocation. What that one investor saw was not all there was.

Indices: Can’t Beat ‘Em, Join ‘Em: Obviously, the entire investment industry is trending towards passive investments. You can’t swing a dead pouty fish without hitting an article touting the death or underperformance of active investment management. And for people who have only been investing over the last 10 years or so, it probably looks like the S&P 500 is a sure bet. Always goes up, right? Well, wrong. While it’s certainly true that the S&P does tend to go up over time, you can never be sure what the time frame will be, and whether you’ll have time to recover from any unexpected downturn. But the bull market we’ve seen since March 9, 2009 isn’t all there is. Actually, if you recall, at that point in time, the S&P 500 had just experienced a 10-year losing streak. Ouch. Don't believe me? Ask any Gen X'er like me how much Reality Bites when the first 10 years of your 401k saving is wiped out by a tech wreck. Sorry, Millennials, but you haven't cornered the market on false financial starts quite yet. 

Investment Opportunities/Herding: Private equity and venture capital dry powder with nowhere to go. Hedge funds all own the same stocks. Crowded trades. High valuations. What investor could possibly make money in this environment? Once again, 13-Fs, Uber and Apple aren’t all there is. Even though we tend to fixate on the visible data, there are a number of niche-y, networked, regional, club-deal and other funds out there getting it done. Even big firms with the right resouces can pound the pavement, do the research or build the quantitative system that generates returns. Don’t believe me? Read the article (link below) on Apollo, who did more deals in the first part of this year than their three largest competitiors put to work in the same period. Just because the managers you’ve seen thus far haven’t done it, doesn’t mean it isn’t being done.

So before you freak out about one of the topics above and eat an entire red velvet cake while standing at your kitchen counter (no judgement).

Before you decide that you should do away wholesale with your hedge funds, private equity funds, venture capital allocation, financial planner, mutual funds or your dating life.

Take a step back.

Breathe.

Sign off of Match.com because, honestly, any site that thinks the best reason for going on a date with someone is that neither of you smokes needs help with their dating algorithm.

And understand that you’re likely looking only at what you know, which may not help you as much as you’d like.

Sources: HFR, http://www.huffingtonpost.com/2015/04/11/andreesen-women_n_7046740.html, Seward and Kissel, http://fortune.com/2016/08/04/hpe-private-equity-apollo-global-management/

A Picture Is (Almost) Worth 1,000 Words

This week, I decided to spare everyone my usual delivery of salty commentary on the investment arena and instead, use two pictures to say my 1,000 words.

So here's this week's blog in cartoon format. Of course, as badly as I draw and with the economic outlook uncertain, these may actually only be worth 500 (or even 5) words. But hopefully you'll get my general drift that:

1. Asset managers can limit themselves by pursuing the biggest, splashiest and easiest to find investors, and
2. Investors can limit themselves by not casting a wide enough net when looking for investments.

Oh, and apologies to Raiders of the Lost Ark...although maybe this attempt at spoofing humor will inspire you to watch it again. 

(c) 2016 MJ Alts

(c) 2016 MJ Alts

Great Expectations

For the last several weeks, I've been watching what I eat. After months of travel and often substituting the contents of my minibar for dinner, I had grown concerned that my bloodstream was permanently clogged with Pringle fragments. So I bought some actual fruits and vegetables (goodbye, scurvy!) and sat down to eat something that didn’t start its life behind a Chipotle counter.

Now, me being me, of course I did my research first, only to discover that I seem to have cognitive dissonance when it comes to portion sizes. I expected that a portion of beef is the literal half-cow that I receive on a plate at Del Frisco’s, when instead it is 3 ounces, smaller than a deck of cards. What. The. Actual. Hell? I felt gypped. I felt bitter. I felt hungry, no make that HANGRY.

But a week later, after sticking to my original plan, I realized I felt full, energetic and, well, maybe even kind of skinny. Maybe the problem wasn't with the reality of eating, but with my perception of what it should be. Hmmmm.

And then I started thinking about investing, and how investors and fund managers seem to be facing similar issues.  No, I don’t mean that those pants make y’alls butts look fat. I mean that there seems to be some serious mismatches between what fund managers and investors expect from one another, almost guaranteeing that one (or both sides) will end up disappointed.

So in the spirit of the newly converted (quick, ask me how many calories a banana has!), here are a few ways that investment industry participants can better get along.

Investor Expectation #1: My fund managers should never lose money.

Reality: I’ve said it before and I’ll say it again – Continuous outperformance is a myth. No fund manager walks on water, is always right at the right time, or is even always right. No money manager can control for the unknown unknowns, and occasionally even the known unknowns can bite them in the tushie. The key is not to look for managers who never experience a drawdown (um, let’s remember money manager Bernie Madoff only posted one loss in his career) but for fund managers who can mitigate, manage and learn from losses, as well as be candid and proactive about addressing them.

Money Manager Expectation #1: My fund is AWESOME and yet no one gives me money. Jerks.

Reality: Your fund may be awesome, but if you aren’t getting assets, there has to be a reason. Maybe you don’t have the right network. Maybe you’re not targeting the right investors. Maybe your strategy isn’t in vogue right now. Maybe the investors you’re targeting are fully committed at the moment. Maybe you don’t mind a fair amount of volatility but other folks do. Maybe you have more faith in your simulated track record than others. Maybe you’re just too small/don’t have the right infrastructure at the moment and therefore folks can’t commit meaningful capital. The list of reasons why you’re not getting capital can be endless. Rather than dwelling on how shortsighted investors must be to overlook your fund, perhaps the best use of time would be figuring out why assets aren’t flowing in your direction and developing a plan to address those issues.

Investor Expectation #2: Money managers shouldn’t make money from the management fees.

Reality: While it’s generally accepted these days that a fund’s management fee shouldn’t be a bonanza annuity for any manager, it is also generally accepted (though sometimes forgotten) that running an investment fund takes moola. You have to be able to attract and pay talent a base salary in good times and bad. You need ample staff for your particular investment strategy. You may need research, IT, and other services. You’ve got to keep the lights on, the firewalls up and disaster recovery plans in place. How much this costs depends on strategy, location, number of investors, staffing requirements and a host of other factors. It’s up to the fund managers and investors (during due diligence) to determine a fund’s true “bottom line” and pay fees accordingly. Rarely will they be “zero.”

 Money Manager Expectation #2: Investors should have infinite time to talk to me about my fund.

Reality: There are generally eight to 10 hours in an investor’s working day. The investors that I speak to often get 20 to 100 emails and calls a day from fund managers. You start doing the math. Oh, and make sure you factor in committee meetings, travel, PowerPoint presentations, conference calls, HR, compliance tutorials, and bathroom breaks. Now do you understand why it took Issac Investor a few days (or a few emails) to get back to you? Or why they only want to chat for minutes, rather than hours, about your fund? To quote The Karate Kid, “Patience, Daniel-San.”

Investor Expectation #3: There’s only one way to be “institutional.”

Reality: As much as we want a “check the box” solution for fund evaluation, it will never exist. Just because a fund manager has a full time Chief Compliance Officer, Chief Operations Officer, Chief Financial Officer, and Chief Information Officer doesn’t necessarily make that fund better than one that has combined or even outsourced some of those functions. Different levels of staffing and infrastructure will be appropriate at different stages of fund evolution and for different strategies. The key is to determine if key functions are covered adequately, not to count C-Suite professionals in the org chart.

Money Manager Expectation #3: Anyone can be a fund marketer.

Reality: Some folks are great at initiating contact with investors, making a concise and compelling case for a fund, pushing gently for follow up and asking for (and getting) a commitment. Some people aren’t. If you aren’t one of those people (see also, Money Manager Expectation Number 1), even if it is your fund and you know it better than anyone else ever could, you should consider delegating those tasks.

What are your “favorite” expectation/reality gaps between investors and fund managers? Sound off in the comments below while I go eat some celery. 

And Now For Something Completely Different...

How many times have you sat through a panel presentation at an investment conference only to be bored out of your damn mind by one session or another?

The topic of the session doesn’t matter. It can be a session on anything from the tax treatment of investments to investors writing actual checks to fund managers on stage - investment porn if you will. 

Indeed, there is only one thing that can kill a panel discussion faster than Raid kills roaches: overwhelming consensus.

“I agree with the prior panelists that (restate what you’ve just heard).”

“I agree with the prior three panelists that (restate again what you’ve just heard two times already).”

“Bob, do you have anything to add here?” “Well, I actually agree with Pat and Mary and that gentleman in the audience…”

C’mon, you know you’ve been there. And whether you’re in the audience or actually on the conference stage, a part of you wants to pick up a chair, throw it, and start chanting “Jer-ry! Jer-ry! Jer-ry!”

Ok, maybe that’s just me.

Now don’t get me wrong, generally I’m a fan of consensus. Consensus over where to eat dinner, what bottle of wine to order, whether or not a particular outfit makes my butt look big - these are good things on which to have input and universal agreement.

But when it comes to investing, I look for a few renegades, rogues and innovators and prioritize utility over unanimity, potential benefit over style and strategy boxes, because that's where excess value lives. 

Last week, Palgrave, the publisher of my 2015 tome Women of the Street: Why Female Money Managers Generate Higher Returns (And How You Can Too), and I launched a Twitter poll. Roughly 130 Tweeters (Twitterers?) responded to the question: “Why do you think gender diversity is important in investing is important?”

This multiple-choice poll offered the following options for answers: Underrepresentation, Higher Returns, Diverse Behavior/Views, and Not Important.

The winning answer (39%) in the poll was “Diverse Behavior/Views”, which was great because that’s essentially my book in a nutshell, and I love the smell of validation in the morning.

I was, however, somewhat stunned that the second most popular answer (30%) was “Not Important.”

Uh, what? How can diverse views and behavior NOT be important in this industry? After all, the investment industry is overwhelmingly Caucasian, male and 35+, and the fund landscape (no matter what the asset class) is dominated by a few large investment firms …and if that ain’t a prime breeding ground for painful consensus, I don’t know what is.

Look, it’s undeniable that some level of consensus is necessary in investing (otherwise you will own a stock, company, bond or other instrument that never increases in value 'cos no one agrees with you about the value), but when we drift towards overwhelming consensus, I believe our ability to make money is diminished. And nothing pisses me off like missing out on returns.

Let’s take venture capital, for example.

• Data from the Martin Prosperity Institute shows that 25.3% of venture capital is invested in San Francisco/San Jose.
• Data from Forbes/Statista shows that 36.2% of venture capital is directed towards software companies, with another 17.3% going into biotechnology.
• And data from PitchBook shows that 45% of venture capitalists with MBAs matriculated from Harvard, Wharton or Stanford.

That's a whole heapin' helpin' of consensus. 

To oversimplify a bit, that means you end up with a Venn Diagram of geography, network and industry that looks a lot like the one below, where anything that is overlapping spells some level of competition (higher valuations, similar concepts, etc.). 

(c) 2016 MJ Alts

But start to change even one thing around and you could end up with increased opportunity. What if you look at the same industries and you went to Harvard, but you focus on, I don’t know, the Southeast, for example? Would it make sense that you might find some highly interesting investments that others might not, or are all the good ideas on the coasts? Or maybe you change your network. With so little capital directed to women and minority entrepreneurs, what if you cultivated a different network (or hired people with differentiated networks) to find out-of-the-box opportunities? Could that open up a new avenue for excess returns? The capitalist in me says, “Yes!” Differences can be good.

(c) 2016 MJ Alts

The same types of things happen in other parts of the investment spectrum, too. I’ve discussed in prior blogs research showing that long-only “benchmark huggers” have less chance of outperformance, (http://www.aboutmjones.com/mjblog/2016/5/3/kicking-the-buckets) and if you think about it, the same should generally be true for hedge funds.

For example, equity hedge funds make up roughly 30% of the overall hedge fund universe by number, and roughly 40% by assets under management. Many of these funds focus on US investment markets, and the vast majority are also managed by white males. This creates a universe of funds that potentially has a similar universe of investment opportunities, similar information available and similar behavior patterns, which can limit outperformance. By modifying one aspect, behavior for example, could we open ourselves up to a differentiated or even higher return? What if we looked at *truly* different strategies? What if…?

(C) 2016 MJ Alts

(c) 2016 MJ Alts

Now, don’t get me wrong. I am not anti-anything that generates (or exceeds) my expected return, and the reason that assets tend to concentrate the way they do is that those firms, industries, strategies, etc. often have a history of success.

But as an industry watcher, I can’t help but wonder what kinds of returns would be possible if investors and asset management firms changed their perspective just a bit and took a road less traveled every once in a while. If we wondered less about how much an investment or new hire or strategy looks like past success and instead asked how it is differentiated and could contribute to our overall success. I’m guessing we’d end up with increased diversification, higher returns and a myriad of other tangential benefits, not the least of which is fewer torturous panels. 

Sources:http://www.theatlantic.com/technology/archive/2016/01/global-startup-cities-venture-capital/429255/ , http://www.forbes.com/sites/niallmccarthy/2016/06/27/which-industries-attract-the-most-venture-capital-infographic/#4b07db986778, https://pitchbook.com/news/articles/harvard-4-other-schools-make-up-most-mbas-at-pe-vc-firms

The Five P's of Gender Parity

A few weeks ago, I attended an interesting and informative event on women and investing. One of the sessions was focused on how to increase gender parity within the investment industry. The discussion eventually coalesced around five key drivers of diversity in investments: Pipeline, Parenting, Presence, Pay and Promotion.

Kicking The Buckets

Ever since that mawkish movie starring Jack Nicolson and Morgan Freeman came out in 2007, it seems people can’t stop talking about their “bucket lists”. There have been songs written about the topic (“I went 2.7 seconds on a bull named Fu Man Chu...”), Internet memes created, and the phrase has completely wormed its way into our day-to-day chatter (Ooooh! Going to Thailand is totally on my bucket list!).

In full disclosure, I actually hate both the phrase and the concept of a bucket list. I try to do and say the things I want in the moment, rather than wait for my impending death to be a motivating factor. Right now, the only things on my bucket list are 1) get a tattoo (impending death will remove my long-term tattoo commitment-phobia); and 2) write a salty tell-all about the investment industry that is equal parts Bridget Jones Diary, The Office and Game of Thrones.

With that last goal in mind, some of you out there should be wishing me good health and longevity every darn day. But I digress.

Based on my knowledge of human behavior, I can’t say I’m surprised about our love of the bucket list. We love, love, love to put things in buckets and boxes and to create certainty where there is none. Studies have shown that uncertainty actually causes more stress than actual pain. And, after all, what’s more uncertain than death? So if having prescribed list makes someone feel better about their inevitable demise, maybe it's not all bad, but it is just a coping mechanism. 

Perhaps that also explains our utter fascination with putting investments into buckets. Small Cap, All Cap, SMID Cap Growth. Early Stage, Seed Stage, Growth Stage. Event Driven, Special Situations, Trend Following. Whatever the investment strategy, investors look for ways to group supposedly “like” managers together to streamline the investment process.

But does that actually help or hurt us?

Putting investments in boxes is theoretically easiest in the long-only world. After all, we have ACTUAL boxes in which to put investments thanks to Morningstar. No matter what a manager does, they usually comfortably squeeze into a pre-defined style box, giving investors not only information on what the fund does, but also on how it does, thanks to agreed-upon benchmarks.

But is looking for managers in those boxes to an investors benefit? Martijn Cremers of Notre Dame says “no.” In his analysis of long-only managers he found that the more a manager fits into a box, the more certain an investor could be of one thing: failure. Not surprisingly, benchmark huggers have little opportunity to outperform their, um, benchmark, since they may be holding the same stocks in the same amounts within their funds. So instead of looking for these closet indexers, who make us feel certain and warm and secure (and later, ultimately, poor), Cremers argues investors should be looking for managers who have 40% or less of their holdings in common with their benchmark, and that hold any common holdings in different proportions. While this doesn’t guarantee outsized returns, at least it opens the door to them.

And the bucket story is similar in the alternative investment world.

If I had a dollar for every time an investor or researcher tried to shoehorn a hedge fund into a specific investment bucket, I could probably take time off to write my tell-all.

But the thing about hedge fund strategy buckets is that they are pretty craptastic. It is nigh on impossible for a database or index provider to provide enough granularity into strategies without overwhelming users with a huge number of strategy categories. Historically, the number of hedge fund "buckets" has ranged from a low of about 9 to a high of 100. The former ends up lumping very disparate funds together and the latter is too complex for the average investor to utilize. The result? An imperfect system that, if taken as gospel, can bite an investor in the arse. 

Take, for example, a hedge fund I know well that trades across the capital structure in distressed companies. One group put them in the Distressed bucket. One group put them in Event Driven. One group put them in Multi-Strategy.

Which group is right?

Well, all of them. And none of them.

Hedge fund strategy buckets are catch-alls. They are designed to create some amount of cosmos from chaos, but laser accuracy isn’t their strong suit. You can have all sorts of nuance within a broad category like Equity Hedge, just like you can have all sorts of nuance within a single fund. And no, that’s not “style drift.”

So let’s say an investor decides to look for an Event Driven fund. In their dataset, the fund above is classified as Distressed. They do their search and the fund never pops up, even though it could be just what the investor is looking for. How does that help anyone?

It doesn’t.

And let’s say that a hedge fund is classified within a certain strategy bucket but has a more nichey or nuanced, or even totally unrelated strategy. They may get benchmarked to their strategy bucket, which ultimately has little to do with how the fund actually invests. An investor who relies too heavily on that information could make poor investment or redemption decisions, too.

Again, not helpful.

So I guess I can add one more thing to my bucket list – kicking the (strategy) buckets. While I admit they are probably here to stay, I urge investors to take them with a large grain of salt, perhaps even a salt lick-sized grain. If you must use strategy boxes or buckets or Rubbermaid containers in your investment process, be sure to search adjacent or related strategies when looking for managers. Create blended or custom benchmarks. Don’t let benchmarks make investment decisions. Allow room for nuance and opportunity.

In other words, use buckets the way God intended – for ice and a nice bottle of bubbly and use that to help accept that a little uncertainty can be a good thing.

Sources: http://www.investmentnews.com/article/20160421/BLOG12/160429985/the-active-management-edge-is-found-furthest-from-the-benchmark

https://www.sciencedaily.com/releases/2016/03/160329101037.htm

Money Manager Report Cards

I was going through some old papers recently and, lo and behold, stumbled across my first grade report card. Since I’ve often struggled with authority figures, I opened it with some trepidation and discovered a few tidbits about the past.

1. Much like many employers today, achieving a rating of “outstanding” was impossible by Mrs. Northem’s standards, and is likely the genesis of my overachievement urges.
2. Grades were not merely the results of tests and homework, as they became as I got older, but a more nuanced measure of success.
3. My teacher (and the ones that followed) seemed to actually like me, with Mrs. Northem writing “Meredith is an absolute joy. She has so much curiosity and interest.”

Now, as one of my friends of course pointed out, the end of that sentence could have been left off. He contends that my teacher merely stopped writing before she added:  “She has so much curiosity and interest…that I want to slap her.”

But still.

This little archeological gem made me start thinking about how we grade money managers. We all talk about their collective Grade Point Average (performance) but we tend to get stalled after that.

For example, consider the headlines that of late argue hedge fund managers have generated poor performance, particularly relative to their fees.

What does that mean, exactly?

Let’s assume that means that the average hedge fund has essentially a “C” GPA. If there are five funds (because the math is easy), what grades did each fund make?

1.  3 A’s and 2 F’s
2.  3 A’s and 2 D’s
3. 4 B’s and 1 F
4.  5 C’s
5. 4 C’s and 1 D

For some reason, financial pundits seem to think the answer has to be either 4 or 5, when, in fact, every combination of the grades above would generate that C average.

While certainly Garrison Keillor can’t be right when he quips “all our children are above average,” it is important to remember that when we talk about average performance some funds, potentially a great many funds, will have performed above that average, while others will have performed below the average. It’s math, y’all.

But before we even get too tied up in our numeric underpants, let’s also consider that the “grades” we give our managers are not as simple as a single performance number.

Just like my reading “grade” was comprised of understanding, reading aloud, attacking new words, interest and writing, in which I earned “D”oes good work across the board (with the exception of writing…I’ve always had the handwriting of a serial killer), how we measure managers is, or should be, comprised of a number of different factors.

1.  Did the manager perform as expected? Not every manager or strategy will perform well in every market. If, however, the fund performed as we expected given the prevailing market and strategic considerations, that should be taken into consideration. For example, marking down a short seller for not generating eye-popping positive returns during a raging bull market is insanity and a push towards style drift.
2.  Is the manager taking the risk I expect him to take? If a fund manager starts taking increasing risk with your capital as they chase some illusive performance benchmark, that’s more cause for concern in my book than underperformance.
3. Does the manager communicate effectively? Do you have sufficient transparency and frequent updates so you can evaluate how you feel about items 1 and 2?
4. How does the manager’s performance fit into my overall portfolio? No fund is an island, but is instead part of an overall asset allocation plan. Managers and strategies should contribute when you expect them to (see above), but again, constant outperformance is more of a myth.

Perhaps because much of the media doesn’t get the full picture, or perhaps because, like me, they’re a bit removed from their old report cards, too many folks become entirely too fixated on manager GPA. Unfortunately, that leads those less familiar with investing to potentially make decisions based on this all-too-linear thinking as well, perhaps even ignoring investments that could have a positive impact on their overall portfolio because they are “bad.”

And that’s really the shame, here. Because if we look behind the manager “grades” we would see that many investors, two-thirds in fact, believe their hedge fund investments actually met or exceeded their expectations in 2015, according to Preqin data.

Which means that either more than half of our industry suffers from the “Lake Woebegone Effect” (all my managers are above average) or there is more to the story than simple average performance.

As someone who “D”id good work with numbers, even back in 1978, I’m betting it’s the latter. 

Please note: My blog is now published on the first and third Tuesday of each month. 

Person or People?

I’m a crazy cat lady. Those that know me well in the industry are already clued into that fact. Those that don’t know me well probably at least suspected it. After all, no one can be this sarcastic and inappropriate without spending an inordinate amount of time by herself.

What folks may not know is I am, in fact, a total bleeding heart when it comes to any animal. I have stopped my car to rescue skunks, turtles, dogs, and cats. I have nursed injured geese and mice. In fact, just before Christmas I found homes and no-kill shelter placements for 48 cats that a even crazier cat lady was hoarding in her BFE, Tennessee trailer.

So imagine my outrage when the story broke about a baby dolphin that died after a bunch of total effing morons passed it around on the beach for selfies.

Come. On.

I was so pissed I stomped around the house blathering on (to myself and to my three cats) about how stupid the entire human race has become and how this is all a sign of the total end of civilization, which I am sure some idiot will capture on a freaking GoPro.

And then I started to calm down. I did what those of us who work with causes have to do so often when confronted by things too horrible to imagine. I breathed and I began to think about all of the people that I know who do good things for the world. How private equity veteran Jeremy Coller is a vegetarian and a champion for farm animal welfare. How 100 Women in Hedge Funds raised more than GBP550k for children’s art therapy. How one of my favorite seeders and one of my favorite family office guys both do volunteer work with wildlife and schools in Africa every year.

As a level of sanity returned, I remembered a quote from the existential masterpiece Men In Black: “A person is smart. People are dumb, panicky dangerous animals and you know it.”

http://memeguy.com/photo/42477/men-in-black-quote-seems-more-relevant-by-the-day

I needed to re-focus on persons. Not people.

All too often, however, we tar a person with our people brush. Sometimes it’s well deserved (not to mention a time saver), but most of the time we find that there are exceptions to every rule.  And while it’s hard for most of the public to imagine them as individuals, this is also the case in the world of alternative investments.

Let’s consider some of my fave hedge fund “you people” themes:

Hedge Funds Keep Getting Crushed – Sure, most index providers show hedge funds started the year down more than 2% on average, but that means some funds did worse and…gasp….some funds did significantly better. Hopefully you saw some of the latter in your own portfolio, but if not, Business Insider proves this point with this handy article.

Hedge Funds Charge 2 & 20 – In their study “All That Glitters” Elizabeth Parisian and Saqib Bhatti conclude that pensions pay roughly $81 million in hedge fund years per year, amounting to roughly 57 cents on every dollar of profit. In December 2015, Eurekahedge reported that average hedge fund performance fees last touched 20%  in 2007, while Citibank reported that management fees were, on average 1.59%, with an operating margin of 67 basis points. I’ve seen several funds launch of late with either no management fee or zero performance allocation. And what we’re talking about? They are just the headline fees. Most managers, roughly 97% the last time I polled them in 2013, were willing to drop fees for large investments. That’s a whole lot of persons charging less than “those people.”

Hedge Fund Billionaires – Google “hedge fund billionaire” and, if you’re like me, you’ll get 131,000 results in about 0.57 seconds. Of course, what’s interesting about that fact is it is probably roughly 130,500 hits higher than the actual number of hedge fund billionaires. If one assumes that all hedge fund managers with AUM over $1 billion are, in fact, billionaires (a stretch if I’ve ever heard one), then that leaves roughly 9,500 hedge fund managers who are not billionaires, unless they secretly won the family inheritance or actual lotteries. That’s a pretty unbalanced barbell on which to base any kind of income assumption. And of course, that doesn’t take into account that a hedge fund manager, even a Big Billionaire Hedge Fund Manager, can lose money for the year if they don’t achieve profitability for their clients.

At the end of the day, as my former boss, George Van, used to say, “hedge funds are as varied as animals in the jungle,” and boy, is he right. And whether we want to believe it or not, hedge fund managers are individuals first, and “those people” second.

The moral of the story? Generalizations are generally not your friend. They make you mad. They make you sad. They may make you ignore investment options based on public opinion rather than facts. Instead, take a moment to slow down and individualize. Unless I find out you took a selfie with that dophin, in which case, I suggest you speed up and use your head start. 

Can You Describe The Ruckus?

A tragic thing happened to me last week. I was (gasp!) ma’amed.

No, not maimed. Ma’amed.

While dealing with a very unfortunate chimney repair at my humble Nashville cottage, my two, rather incompetent, repair technicians called me ma’am. Not once. Not twice. But 37 times in one conversation.

It was like having a cold dose of mortality thrown in my face.

Even though I still have the sense of humor of a 12 year old, being ma’am bombed let me know that I have officially hit middle age, which coincidentally may also explain why my “give-a-damn” broke about two years ago as well. They do say, after all, that only little kids and old people tell the truth.

But my brush with ma’am-dom did make me start to think about how the investment industry may change going forward, what with a heaping helping of Millennials headed our way. After all, according to a 2014 Millennial survey by Deloitte, the next generation will comprise 75% of total workforce by 2025. Boomers and Gen X – gird your loins.

Changes That May Be A’Comin’

1)   Socially Responsible Investing Will Surge – Although percentages vary from survey to survey, and between income groups as well, one thing is very clear: Millennials are much more open to socially responsible investing than prior generations. In one study of high net worth investors’ attitudes towards socially responsible investing, nearly half of Millennials considered social responsibility when making investment decisions compared with a mere 27% of seniors. In a study of all investors, Morgan Stanley’s Institute for Sustainable Investing found Millennials to be more than 10 percentage points more likely to favor sustainable investing than their Boomer counterparts.

(C) 2016 MJ Alts. Data Source Morgan Stanley Institute for Sustainable Investing

This attention to social factors is likely to boost both the number of products launched to pursue some form of socially responsible investing (ESG, Impact, Mission, Socially Responsible, etc.) and to simultaneously increase the demand for said products. As of year-end 2013, one out of every six dollars invested in the U.S. was already invested in SRI strategies (according to the US SIF Foundation), but it is safe to assume that the demographic shift will accelerate this trend.

The upshot? You might want to get ahead of this trend sooner rather than later.

2)   Our Historically Paper and PDF Industry Will Evolve – As luck would have it, I had not one, but two chances to feel old last week. I was speaking with a friend of mine who was extolling the virtues of Tinder. She loved the speed of the “dating” service and the ability to judge people quickly. I then lamented that I missed the days of a good old personal ad.

“You mean like Match.com?” she asked.

“Um, no,” I said. “ I mean like the ones that were in the paper and alternative news in Nashville. You know, Single White Female, blah blah blah…”

“Oh!” she exclaimed. “You mean like on Craigslist.”

“Noooooo,” I said. “I mean printed, paper singles ads. My favorite appeared in the back of the Nashville Scene one day and read ‘Single White Male, fat, ugly and bald, seeks Asian women with long toenails.’ People had to be creative and witty and not just post shirtless bathroom pictures….”

She blinked at me blank-faced in response.

Most Millennials don’t know a world without the Internet or iPhones (or as I like to call them, secular rosaries). Instagram, Pinterest, Twitter, Uber, AirBNB and all sorts of social and disruptive technologies have been at their fingertips (literally) for most of their lives. I can only hope that this comfort with technology leads to some revolution in the investment industry, which has long been dependent on pitch books and PDF one-pagers. I’m not sure what the answer is for this (and God save us from a Tinder app for investments where appearance is everything and substance & due diligence are lost), but there has to be some better ways of doing things than the way it’s been done for the nearly 18 years I’ve been in this space.

3)   The Traditional Pathways to Fund Management May Evolve – Does anyone remember the kid that applied to 2,000 private equity firms last year in order to skip an investment banking stint? Have you read any of the many articles on how to get hired into private equity/hedge funds/ venture capital straight out of undergrad? What about the gig economy? Job hopping? Millennial requirements for work-life balance? No matter how you slice it, the bios of next generation fund managers are likely to look pretty different than what we’ve grown accustomed to in the past.

I’m sure there are plenty of other ways that the industry may evolve in the next 10 years or so, but you can bet I’ll be ruminating on at least these possibilities going forward. At least until the re-release of Pretty In Pink hits theaters next weekend. I’ll be hanging with Duckie that day.

No Quick Fix

Because of the research I’ve done on gender and investing, and, let’s face it, because I am an opinionated and often colorful commentator on all things investing, I get asked one question a lot.

What can we do to fix the gender imbalance in investing?

I think some people expect me to come up with a quick and pithy hack to fix the problem. Something akin to Ronco’s “Set it and forget it!”

It’s likely that some folks want me to utter the dreaded Q word (“quota”), although they should really know by now that’s just not how I roll.

A very, very few want me to say “there is no problem” so they can get back to other matters.

But almost no one really wants to hear the truthful answer to the question, which is this: “I’m not sure what the answer is.”

One thing I am positive about is that the answer is as complex as the problem, much of which is rooted in bias. Now this is not necessarily your grandparent’s or even your parent’s bias. Thankfully the days where consumers were likely to be treated to an ad like this are gone. 

But if you are human, you have bias. Period. And here’s how those biases (both men’s and women’s) might be impacting the number of women in investing:

It Starts Early – A study by Jane Stout, Nilanjana Dasgupta, Matthew Hunsinger, and Melissa A. McManus of UMass Amherst found one of the reasons women may not pursue math is rooted in bias. When faced with a male math professor, 11% of women attempted to answer questions posed to the class at the beginning of the semester. At the end of the semester, that number dropped to 7%. In contrast, female students only attempted to answer questions posed by a female professor 7% of the time at the beginning of the semester, but attempted to answer 46% of the time by the end of the semester. Similar trends were shown in other areas of the classroom experience, including after class requests for help, confidence and test taking (http://www.slate.com/articles/health_and_science/the_hidden_brain/2011/03/psychout_sexism.html) With less than 1 in five math & science professors at top universities women, it is easy to see that the pipeline could narrow early.

The Pipeline Shrinks Further - In 2014, only 37% of MBA applicants were women, and of those, only 6% pursued investment banking compared with 11% men in that field. Also in 2014, 77% of investment analysts were men, who were 20.3% more likely to get an early analyst offer than women. A 2011 Vault study of the largest investment banks in the US found only 25% of staffers were women, 11% of executives were women and only 3% of CEOs at these firms were women per Catalyst. While it is difficult to single reason for these low numbers, culture, mentorship, appeal, and a lack of role models likely all come into play.

Hiring Hurdles – Early last year, Marc Andreessen took copious amounts of, um, “poop” for stating that he has no female partners at his firm because he’s tried to hire one and each time she turned him down. Obviously, there must be more than one qualified female applicant out there, so why isn’t a venture capital magnate like Andreessen seeing them? Part of may spring from the bias in the hiring process.

A study published in the American Psychological Association called, “Evidence That Gendered Wording in Job Advertisements Exists and Sustains Gender Inequality” showed that subtle word choice differences in job postings impacted who responded to those postings. For example, the following ad (http://www.eremedia.com/ere/you-dont-know-it-but-women-see-gender-bias-in-your-job-postings/#) was re-written with feminine and masculine themed words. The feminine ad, perhaps not surprisingly, attracted more women applicants. Now think about the ways we tend to describe asset managers and perhaps it’s not so mysterious why the pipeline has historically sucked. 

Assuming that women do apply for an investment role they have to make it through the resume gauntlet. A recruitment firm created a resume and sent it to 1000 hiring managers. Half of the resumes were attributed to Simon and half were attributed to Susan. At large firms, Simon was preferred over Susan 62% to 56%. Women hiring managers felt Susan matched 14 of 20 job attributes, while Simon matched six, and male hiring managers felt exactly the opposite. (http://www.news.com.au/finance/work/careers/the-same-resume-with-different-names-nets-different-results/news-story/a2a182fb4570e948c27ce63139ee66b1) The upshot? Bias, bias everywhere.

Promotional Considerations – If women do enter the investment arena, they then still have to work their way to the top. Even workplaces like Barclays Capital, who just shared they now employ more women than men (51% to 49%) struggle when it comes to women in the C-suite: 80% of top level positions at Barclays are held by men. The list of potential reasons for this are endless, but a great list can be found in this article, http://www.businessinsider.com/subtle-ways-women-treated-differently-work-2014-6, which details the biases women face when climbing the corporate ladder. Chief among them? Mommy track, networking opportunities, participation in meetings (air time, interruptions), expressing displeasure, etc.

At the end of the day, it is supremely difficult to find a simple fix to these issues. Unconscious bias is, in a way, more difficult to deter because it’s, well, unconscious. These behavioral patterns are pretty inaccessible to the conscious mind and therefore can be very difficult to change.

However, for those firms that are looking to improve their diversity metrics, or those investors who are looking to improve their ratio of male to female money managers, it can be helpful to at least recognize where some of the issues arise and to take steps to guard against the biases where we can. For example, there is software that can create “gender neutral” job postings. Blind resumes can help avoid the Simon-Susan conundrum. Having mixed teams of interviewers can help to balance male and female hiring and promotion biases. Groups like Rock the Street Wall Street (http://www.rockthestreetwallstreet.com) and Girls Who Invest (http://www.girlswhoinvest.org) can help young women overcome their own biases towards math and finance. Certainly, there are a lot of changes required, but they could potentially add up to better gender diversity over time. 

To be clear, no woman I know is asking for special treatment when it comes to hiring of any kind (employment, fund selection, etc.). Every single woman with whom I speak wants to earn their place in investment management and is willing to get scrappy when required. But, in the immortal words of Paul Simon, women do want to know that the “cross is in the ballpark.” Until we can all figure out how to mitigate some of our biases, that may be hard to ensure. 

Sources: In addition to those cited throughout - Graduate Management Admissions Council, Universum, http://www.songfacts.com/detail.php?id=5492

All The News That Was Fit to Print (And Some That Wasn’t)

As y’all recover from the excesses of fried turkeys, stuffed stockings, too much ‘nog and an overdose of family time, it seems like a good time to catch up on some light reading. So, in case you missed them, here are my 2015 blogs arranged by topic so you can sneak in some snark before you ring in the New Year.

Happy reading and best wishes for a joyous, profitable, and humorous 2016.

Happy Holidays from MJ Alts!

HEDGE FUND TRUTH ANIMATED SERIES

http://www.aboutmjones.com/mjblog/2015/6/29/hedge-fund-truth-series-hedge-fund-fees

http://www.aboutmjones.com/mjblog/2015/6/1/the-most-hated-profession-on-earth

http://www.aboutmjones.com/mjblog/2015/3/2/the-hedge-fund-truth-launching-and-running-a-small-fund

http://www.aboutmjones.com/mjblog/2015/1/19/savetheemergingmanager

WOMEN AND INVESTING

http://www.aboutmjones.com/mjblog/2015/12/13/dear-santa

http://www.aboutmjones.com/mjblog/2015/11/16/not-so-fast-times-at-hedge-fund-high

http://www.aboutmjones.com/mjblog/2015/9/25/doing-well-doing-good-improving-investment-diversity

http://www.aboutmjones.com/mjblog/2015/7/26/the-evolution-of-a-female-fund-manager

http://www.aboutmjones.com/mjblog/2015/6/10/advice-to-the-future-women-of-finance

http://www.aboutmjones.com/mjblog/2015/4/27/diversification-and-alpha-by-the-book

http://www.aboutmjones.com/mjblog/2015/4/20/excusa-paloosa-the-sad-excuses-we-give-to-avoid-small-funds-gender-diversity

http://www.aboutmjones.com/mjblog/2015/3/8/whats-in-a-name-what-manager-names-tell-us-about-diversity

http://www.aboutmjones.com/mjblog/2015/1/26/dont-listen-to-greg-weinstein

EVERYONE HATES ALTERNATIVE INVESTMENTS (ESPECIALLY HEDGE FUNDS)

http://www.aboutmjones.com/mjblog/2015/12/7/keen-delight-in-the-misfortune-of-hedge-fundsand-me

http://www.aboutmjones.com/mjblog/2015/2/2/mfp1glk0exk0vlnqtpx6lby2ba9z8n

http://www.aboutmjones.com/mjblog/2015/11/23/babelfish-for-hedge-funds-1

http://www.aboutmjones.com/mjblog/2015/11/8/hedge-funds-bad-reputation

http://www.aboutmjones.com/mjblog/2015/10/5/dear-hedgie

http://www.aboutmjones.com/mjblog/2015/9/9/investment-professional-fact-fiction-the-business-trip

http://www.aboutmjones.com/mjblog/2015/5/17/hedge-funding-kindergarten-teachers

http://www.aboutmjones.com/mjblog/2015/4/14/are-hedge-clippers-trimming-up-the-wrong-tree

http://www.aboutmjones.com/mjblog/2015/3/28/hedge-fund-high-entertainment-an-open-letter-to-showtime-about-billions

http://www.aboutmjones.com/mjblog/2015/3/13/venn-dication-what-simple-relationships-do-dont-tell-us-about-alternative-investments

http://www.aboutmjones.com/mjblog/2015/2/16/rampallions-scullions-hedge-funds-oh-my

FUND RAISING & INVESTOR RELATIONS

http://www.aboutmjones.com/mjblog/2015/6/22/swingers-and-the-art-of-investor-communication

http://www.aboutmjones.com/mjblog/2015/4/5/7-secrets-to-a-successful-fund-elevator-pitch

http://www.aboutmjones.com/mjblog/2015/2/9/what-how-i-met-your-mother-can-teach-us-about-hiring-fund-raising-staff

http://www.aboutmjones.com/mjblog/2015/10/26/founding-funders

http://www.aboutmjones.com/mjblog/2015/8/28/crisis-communication-for-investment-managers

http://www.aboutmjones.com/mjblog/2015/7/20/trust-me-im-a-portfolio-manager

http://www.aboutmjones.com/mjblog/2015/5/4/the-declaration-of-fin-dependence

http://www.aboutmjones.com/mjblog/2015/1/11/new-years-resolutions-for-investors-and-managers-part-deux

EMERGING MANAGERS

http://www.aboutmjones.com/mjblog/2015/8/17/people-call-me-a-skeptic-but-i-dont-believe-them

http://www.aboutmjones.com/mjblog/2015/10/19/are-you-the-next-blackstone-dont-count-on-it

DUE DILIGENCE

http://www.aboutmjones.com/mjblog/2015/11/1/the-evolution-of-due-diligence

http://www.aboutmjones.com/mjblog/2015/8/6/a-little-perspective-on-the-due-diligence-process

GENERAL INVESTING INSIGHTS

http://www.aboutmjones.com/mjblog/2015/9/19/misusing-these-popular-alternative-investment-terms-inconceivable

http://www.aboutmjones.com/mjblog/2015/10/11/investment-wisdom-increases-with-age-dance-skills-dont

http://www.aboutmjones.com/mjblog/2015/8/24/the-love-of-the-returns-chase

http://www.aboutmjones.com/mjblog/2015/8/2/slamming-the-wrong-barn-door

http://www.aboutmjones.com/mjblog/2015/6/8/the-confidence-hubris-conundrum

http://www.aboutmjones.com/mjblog/2015/5/10/the-crystal-ball-in-the-rearview-mirror

http://www.aboutmjones.com/mjblog/2015/3/19/fun-with-dots-visualizing-bifucation-in-the-hedge-fund-industry

http://www.aboutmjones.com/mjblog/2015/2/23/pattern-recognition-may-make-you-poorer

http://www.aboutmjones.com/mjblog/2015/1/5/new-years-resolutions-for-investors-managers-part-one

What do you want to read about in 2016? List topics you enjoy or would like to see more of in the comments section below.

In the meantime, gird your loins for the blog that always parties like it’s 1999, even when it’s 2016.

And please follow me on Twitter (@MJ_Meredith_J) for daily doses of research, salt and snark. 

Dear Santa...

Think there's not enough evidence to demonstrate that gender diversity can boost returns and improve diversification? Take a look at the infographic below and see if you still feel the same way...

(c) 2015 MJ Alts

Hedge Funds' "Bad Reputation"

I had yet another wedding to attend this weekend: My third in four weeks. I may never get all this rice out of my hair. Seriously.

But as I was driving to this happy event, a few questions rolled through my mind:

Was I dressed appropriately? (Not really.)

Was I going to make it before the bride actually walked down the aisle? (Just barely.)

Would there be a reprise of my “Footloose Dance” humiliation during the reception? (Thankfully, no.)

And then a strange thing happened. As I cruised onto the Ashland City Highway, a familiar tune pulsed from my speakers.

“An' I don't give a damn 'bout my reputation

The world's in trouble, there's no communication

An' everyone can say what they wanna say

It never gets better, anyway

So why should I care about a bad reputation anyway?

Oh no, not me, oh no, not me”

Yes – Saint Joan Jett had arrived to calm my nerves before I rushed into the small rural church, just in time for the wedding. To say I rocked those last five minutes of the drive would be an understatement.

When I awoke on Sunday morning, I was faced with a somewhat similar scenario. Hedge funds were skewered yet again; this time in an article by the New York Times referencing a study of eleven pension funds entitled “All That Glitters Is Not Gold.”  

The study demonstrated that hedge funds had added little value to public pension funds (in many cases underperforming the fund as a whole) and cost an exorbitant amount, based on the authors’ arbitrary 1.8% and 18% fee structure.  

The report concludes: “Although hedge fund managers have convinced many investors that they provide investment products so uniquely profitable that extraordinarily high fees are warranted, our research suggests that there is little evidence to back up these claims.”

Oh joy. Seems I’m not the only one that needs to be concerned with my reputation.

But, upon further study of the report, I noted a couple of interesting points that are, I think, at least worthy of consideration.

Time Periods Matter: Of the eleven pension funds reviewed for the study, nearly half included only the bull market period that started in 2009. There was no period longer than 13 fiscal years in the study (about the time the first pension funds dove into the hedge fund waters), and actually only one of those. For the pension plans that did include the 2008/09 fiscal year, in every case, based on visual interpretation of the line graphs, the hedge fund portfolios outperformed. So it would appear that, given the appropriate market environment, hedge funds can and do perform. So should we draw concrete performance conclusions on hedge funds’ performance during what has been a raging bull market? As we all know, if a fund is truly “hedged” it is nigh on impossible for that fund to outperform a market with its foot on the gas.

Manager Selection Matters: As investors, we make choices about our investments. Our choices are informed by the amount of money we have (or don’t have) to invest. They are informed by investment bylaws and state regulations. They are informed by the universe of investment options of which we are aware. They are informed by the amount of time we have to devote to our investment research. They are informed by our behavioral biases and those of other key decision makers. In other words, fund selection isn’t straightforward. Think about how hard it is to order a great entrée in a restaurant – and now picture that entrée costing thousands or millions of dollars. Get my drift? 

No matter how you look at it, each investor has some responsibility for their fund selection.  What’s interesting about this study is, again, based on eyeballing the line graphs, it looks like the plans reviewed generated hedge fund returns of about 8.3% in FY 2014. If you look at the NACUBO/Commonfund review of 832 endowments, in contrast, you see that they averaged a 9.9% return from “marketable alternative strategies.” Now, granted there could be a difference in terminology, or there could be something there. After all, I always say in investing, Your Mileage May Vary, and manager selection is a huge part of that. Even among the eleven managers in the "Glitters" study, there is a large variance in overall portfolio and hedge fund performance. 

So maybe the problem isn’t the investment vehicle. Maybe there is something that public pensions and others that are disappointed with their hedge fund earnings could learn or adapt from public endowments' approach to hedge fund investing. After all, endowments entered the hedge fund fray a bit before their public pension brethren. And, now this is just a thought, but looking at the largest endowments in the NACUBO study, they’re kind of kicking ass when it comes to hedge funds. Their marketable alternatives strategies returned 11.4% in FY’14, well above hedge fund industry averages and well above what others may be experiencing. What’s the what here? Should we be looking to those investors to figure out what ingredient we may be missing from our own secret sauce? It's not that the pensions included didn't do an admirable job of building portfolios, as each beat the overage hedge fund average, but is there something that could be done (structurally, in manager selection or otherwise) to boost returns?  

Fees, Fees, Fees: As I mentioned, the study uses an arbitrary 1.8% and 18% fee structure, even though we know that industry average is closer to 1.5% and 17%, but let’s even leave that aside for a moment. We really have no way of knowing what these pensions paid in fees unless it is publicly disclosed. If they went into a separate account, for example, they may have a totally different fee structure. If they negotiated a lower fee, that’s also difficult to know. In many cases, public pension “big dogs” are able to achieve fee concessions that us mere mortals cannot hope to get.

Does this mean I think there’s no wiggle room for hedge fund fees? Absolutely not. Those of you that are regular readers know that I generally support sliding scales for management fees in particular, based on the manager’s total AUM. But even then, it’s not a straightforward “Off with their fees!” equation. Some strategies are more labor intensive than others, which may require higher fees. Newer and smaller funds have very little room between profitability and problems in their fee structures. As in most things hedge fund related, there is not one-size-fits-all fee solution. Investors should advocate for themselves within reason, and managers should protect their ability to attract talent, execute strategy and generate returns for all their investors. It’s all about balance. 

It’s perhaps wise, then, to take a step back and think about whether we have enough data to draw actionable conclusions and, perhaps more importantly, if there is a way to improve hedge funds relationship and return contribution to public pensions. Anything else would be discarding the baby with the bathwater, based on what looks like a bad reputation.