I’m Out of Touch, And You’re Out of Your Head When I’m Not Around

It’s August. It’s slow. It’s what the Hitchhiker’s Guide to the Galaxy might have referred to as the “long dark teatime of the soul” when it comes to investment industry activity. The conference circuit is dead. Everyone is on vacation. There are practically tumbleweeds rolling through your office.

(c) 2018 MJ Alternative Investment Research - I spent my OOO time this year in Middle Earth.

Yep, it’s about this time of year when you believe that everyone but you sold in May and went away.

And you’ve got the Out of Office emails to prove it.

Sure, you’re still sitting in your office, or you’re on a nice beach trying to be productive while your family cavorts and relaxes, dutifully sending out email requests for meetings, performance updates, introductory information, requests for proposals, whatever. And all you’re getting back from Darryl, John, Hall and Oates is “I am currently traveling with no/limited/sporadic access to emails/phone. If you need immediate assistance, please eff off/contact this random person. I will respond to/continue ignoring your email upon my return.”

So what’s an investment professional to do?

If you’re getting the Out of Office (OOO) treatment these days, try these handy tips for coping:

1)    Assume the email you just sent is going into the virtual circular file. It ain’t never gonna be read, answered or otherwise acted upon. Even if the autoreply doesn’t go as far as this particular OOO did to spell things out for you, your chances of getting a timely response are pretty slim. So look at the date the out of office email expires and mark your calendar for one week after that date. On that day, send your email again. Do not forward, do not refer to your prior email. Send a virgin email, to be touched for the very first time, without the guilt and recrimination of a forward. Start fresh. Just like you hope the recipient is doing after a nice, relaxing holiday.

2)    In investing, time is money, but it isn’t life. We’re not carrying hearts around in beer coolers, y’all. Whatever you are emailing about, chances are it can probably wait a week (or two) for a response. Even if it doesn’t feel like it to you in a particular moment. If you get an out of office response, DO NOT attempt to hunt the person down like you’re the Terminator of the email world. On a recent vacation, I had more than one recipient of my OOO decide to text me since they couldn’t reach me via email. Needless to say, given the 17-hour time difference, I was none too happy to receive communication from those individuals in the wee hours of my morning respite from work and responsibility. So, before you go to extreme lengths to contact someone who is out of the office, ask yourself how you would feel if you reached them and they were, I don’t know, at a funeral. Would your call or text be worth disturbing that particular occasion? If the answer is “no” then put down your phone and back slowly away. Otherwise the only funeral you may be going to is yours.

3)    Try a little patience. Most people I know start going through their missed emails from the top down (most recent dates first), in the off chance something has resolved itself in the intervening days or moments and they can blissfully ignore all related messages. If you emailed early on in someone’s OOO timeline, give the person a few days to get back to you. See also, OOO tip one.

4)    For those composing an OOO, go ahead and say you’re not checking emails. Even if you are, there’s bound to be a few you can’t or won’t deal with. Telling people you’re checking emails sporadically or that there’s a “delayed response” gives those receiving your OOO false expectations, and gives them a little more leeway to harass you while you’re grabbing some R&R (or attending a conference, or staycationing…).

5)     Even if you don’t get an OOO response, if you don’t get response from someone after a week during this most humid time of the year, give folks the benefit of the doubt. There’s nothing worse than coming back to the office to find a bunch of pissy emails (“I tried you last week but didn’t hear back”) to make someone NOT want to prioritize you.

If you find you’re just too impatient to follow my Out of Office Etiquette, perhaps you need a little OOO time yourself. Economist Juliet Shor found that Americans take less vacation than the average medieval peasant, who worked around 150 days a year. So make a break from your feudal ways and chillax. You can always start stalking folks again after Labor Day.

Namast-CFA: A Guided Meditation for Investment Professionals

During this holiday week, declare your independence from investment industry stress and worries. Let your cares float away as you enjoy this guided meditation designed for busy investment professionals. Namast-CFA.

(C) 2018 MJ Alternative Investment Research. All Rights Reserved. 

Thank You Sir May I Have Another?!?

Thank You Sir May I Have Another?!?

The first time I ever saw Kevin Bacon in a movie was the infamous and hilarious flick “Animal House.” Although he didn’t yet have the appeal of, oh say, Ren McCormick (me-ow!), he did make an impression on me in his fraternity brother days. Perhaps it was his tight-assed, ROTC-inspired declaration of “All Is Well!” during the movie’s climax that got my attention. But, more likely, it was his tighty-whities in the infamous fraternity initiation paddling scene that caught my eye. I couldn’t imagine, even at the ripe old age of 8, that a grown man would allow another man to paddle him. IN HIS UNDERWEAR. And would cheerfully, though admittedly through gritted teeth, ask for another. And another. And another.

But then again, there are a lot of things I don’t understand, even today at the ripe old age of, well, not 8 years old. For example, I don’t understand why another study showing that smaller and younger funds outperform is necessary or the results touted as surprising.

Haven’t large funds been spanked with this data enough by now for us all to cheerfully conclude that smaller, younger funds outperform their older, larger peers? 

I guess not, because just two weeks ago yet another entry in the small/young fund cannon made its appearance. On April 26th, Chao Gao and Chengdong Yin (Purdue University) and Tim Haight (Loyola Marymount University), used data from the Lipper TASS and the HFR databases to prove YET AGAIN that good returns come in small and new packages. 

Now, as someone who actively supports emerging and diverse (who are often also emerging) managers, I should be happy to see yet another entrant into the verifiable tsunami of studies proving that small and young funds outperform. But really, isn’t it a little bit embarrassing at this point? I mean, it’s not like we don’t have a metric crapton of research that shows small and young funds outperform already, right? But just in case there was ANY doubt left in anyone’s mind at this point, allow me to point you to the studies that may help you reach the well-documented conclusion that, when it comes to emerging managers, all is, in fact, well.

Small & Young Funds Are Killing It – A Non-Exhaustive, But Pretty Damn Complete List of Research

PerTrac studies on emerging managers, 2007-2011

eVestment studies on emerging managers 2012-2014

Mayer & Hoffman paper on emerging managers. May 2006. Also appears in the book “An Investor’s Guide to Hedge Funds” 

“An Examination of Fund Age and Size and Its Impact on Hedge Fund Performance” Derivatives, Use, Trading and Regulation, February 2007

 “An Examination of Fund Age and Size and Its Impact on Hedge Fund Performance,”Journal of Investing, vol. 18, no. 1, spring 2009.

“Emerging Managers: Good Buy or Good Bye?” Barclays Capital, 2011.

“Smaller Hedge Fund Managers Outperform: A Study of Nearly 3,000 Equity Long/Short Hedge Funds” AllAboutAlpha.com, February 18, 2013

“Are Investors Better Off with Small Hedge Funds in Times of Crisis?” City University London, July 14, 2015. 

“Emerging Hedge Funds Outperform Established Peers” Preqin, July 2017 (multiple other years of studies also available)

“Size, Age and The Performance Life Cycle of Hedge Funds” Gao, Yin, Haight, April 26, 2018. 

Want some long-only fund action? I got that, too. How about:

“Does Fund Size Erode Mutual Fund Performance? The Role of Liquidity and Organization” Chen, Hong, Huang, Kubik, December 2004

“Liquidity, Investment Style and the Relation Between Fund Size and Fund Performance” Yan, 2008.

“New Evidence on Mutual Fund Performance: A Comparison of Alternative Bootstrap Methods” Blake, Caufield, Ioannidis, Tonks, October 2015.

“On Size Effects in Separate Accounts” Evans, Rohleder, Tenesch, Wilkens, August 2017.

And how about some Private Equity findings? 

“Making the Case for First Time Funds” Preqin, November 2016

“Feels Like the First Time” PitchBook, 4Q2017

As I mentioned, this is a decent representative list of studies of small and new funds across the asset management spectrum. It is not exhaustive, mostly because I’m not sure it needs to be. I mean, you can’t really be standing there decked out in your undies asking me to hit you with even more data, right? So, let’s put the kibosh on proving something we should already know and just work to bring home the Bacon by investing in funds of all shapes, sizes, ages and types, not just tried and true established managers. 

The 5 Types of Investors You Meet Capital Raising

I’d like to think I’m not big into snap judgements, but a recent trip to the left coast in super-glamorous coach showed me that I’m completely full of it on that front. As I sat in my window seat waiting for my fellow fliers to board, I quickly sized up each and every passenger as they came down the aisle to determine whether they were someone I wanted to share air (and an armrest) with for the next four hours. 

I mentally begged for the tiny old ladies. Anyone the size of a professional athlete (save maybe a jockey) I tried to psychically hurry past my row. I mean, seriously, those coach seats aren’t wide enough for a five-foot three figure skater, let alone a member of the NFL. 

In fact, I still sometimes have flashbacks to a flight a couple years back when I was marooned next to a professional bowler for five hours. He was completely lovely, for what it’s worth. He even offered me a piece of gum mid-flight. Sadly, when he pulled said gum out of his pocket, it had liquified. I guess the heat that had built up to Dante’s Inferno level between our inexorably connected hips was just too much for a pack of Juicy Fruit to take. 

Yeah, just thinking about that again kind of made me throw up in my own mouth.

Anyway, after the tall but sinewy gentleman took the middle seat on my recent flight, I had plenty of time to think about investment industry stereotypes as I tried not make arm or thigh contact midflight. And since I’m often picking on managers in this blog, I decided to fixate on investors for once. 

So here you go! 

It’s a completely unscientific, grossly generalized profile of the five investors most money managers meet.

The Tomato Seed– As a Southern girl, I know a thing or two about tomatoes. I know that any tomato eaten before the month of July (or after the month of September) is likely to taste like a whole lot of nothing. I know that, after a certain age, I’ll be required to grow tomatoes if I want to continue living in the South. And I know that tomato seeds are slippery little buggers. Seriously, try cutting a good beefsteak tomato on a cutting board. Now try to pick up one seed on your finger. I bet it squished away from you, didn’t it? Tomato Seed Investors are the exact same way. You can try to pin them down on something (a phone call, a visit to their offices, a due diligence trip, a date for subscription docs to arrive) and you just can’t quite to get them to stick. Tomato Seeds may employ a variety of tactics to slide away… “I’m sorry I didn’t see your email.” “I’m in another city that day, try again next trip.” “Contact my assistant (she’s out for maternity leave)…” but the result is always the same. 

The T-Rex-  You’ve seen a T-Rex right? Not a real one, obviously, but a rendition or skeleton of one, I’m betting. You know how they have really short arms? Picture those arms trying to reach into their pockets to grab a wallet. There’s no freakin’ way, right? T-Rex Investors similarly have very short arms and very deep pockets. They may say all the right things about how great your strategy is or how they love your team and your energy. They may even go through the full due diligence dance before all is said and done. But they never actually hand you any money. T-Rex Investors are one of the trickiest to deal with in the wilds as you don’t actually know who they are until you’re at least two years in. Up until that point, you kind of have to keep being nice and going through the motions, but once you’ve met a T-Rex, you’ll always be a bit scarred by the experience and perhaps even prone to pushiness with future investors. 

The Ghost– For anyone who has ever dated on Tinder, Bumble, Match or, hell, just dated period, The Ghost is a familiar figure. You meet The Ghost Investor at a conference or event. You have a great conversation. There’s terrific follow up. You have another meeting or talk shop over a lovely Merlot. And then The Ghost, well, ghosts. You send emails that fly into cyberspace, never to been seen or heard of again. You leave messages on every available phone the investor has but get no return call. You contemplate hiring a medium to see if you can raise The Ghost Investor from the dead, all to no avail. The Ghost has disappeared, likely never to be seen in more than passing again. They may appear as a brief apparition at a conference but are usually viewed in passing (as they spirit away from all the managers they’ve ghosted before) or from a distance. 

The Doorknob– One of my ex-boyfriends was a doctor. He liked to tell me how his day was over dinner and more than a few gin and tonics. Some of the stories were sad, some had delightfully happy endings, and some were SSDD. The most common refrain was complaints about patients who waited until Doctor Dude’s hand was literally on the doorknob, walking out of the exam room, to tell him that something else was wrong. It could be small, like an ingrown toenail, or utterly ridiculous in a “Hey-doc-did-I-tell-you-I-faint-every-time-I-walk-up-the-stairs?” kind of way. Whatever it was, it always stopped Doctor Dude cold. He’d thought he’d reached escape velocity and then WHAMMO! There are investors who excel at The Doorknob, too. You jump through every hoop and are told, explicitly or implicitly, that a wire is imminent. Then, The Doorknob strikes. “Oh, hey…we were just wondering about the trader you fired three years ago…can you provide his contact details to us?” “Gee, we’re really close but we are actually going to need to chat with your compliance person again to get her perspective on your ERISA AUM.” “So, it’s probably nothing, but in our background check we discovered that your chief information officer has a criminal record and we’re gonna need to clear that up.” Whatever it is, it hits you in the face like a glass of ice water and it has to be dealt with before you get any moola. Makes you want a gin and tonic too, right? 

The WOW– The WOW Investor (Walk On Water) is the rarest of all investors. They return calls and emails within a reasonable amount of time. Their due diligence process, however lengthy, goes exactly according to plan. They clear up issues quickly and efficiently. They understand that, in order to run a successful business, you actually need cashflow to pay talent and build infrastructure AND they don’t begrudge you making a little coin, too. They call when they have questions and potentially provide insight into how best to communicate with other investors. The WOW investor is the Holy Grail of Limited Partners. They can be confused with the T-Rex and the Ghost, at least for a period of time, but will distinguish themselves in relatively short order by, oh, writing a check or returning a call. If you are lucky enough to find a WOW Investor, you should do everything in your power to keep them happy, up to and potentially including offering them your first-born child. Your wife or husband may grumble, but then again, they’ve never had to deal with the less desirable types of investors. 

As you go about your capital raising business, be on the lookout for each of these types of investors. You may not be able to ID them as quickly as I could a potential seatmate on my flight, but you’ll get better at it over time. 

On The Road Again...

Last week, I almost peed in my hotel room closet.

Yeah, you read that right.

It was the middle of the night. I’d been in different hotels (interspersed with brief sojourns at home) for part of every week since the beginning of the year. And for one brief and almost disastrous moment, I simply forgot where I was. Luckily, I came to my sleep-addled senses when I tripped over one of my own shoes, placed strategically outside the closet door. But still, it was a sobering moment.

Many of us that work in the asset management industry spend a tremendous portion of our lives on the road. Money managers must travel to drum up investments, to keep current investors happy and informed, present at investment committee meetings and otherwise support their assets under management. Investors trek for diligence visits, periodic onsites, and other gatherings (trustee meetings/retreats, investment committees, etc.). And of course, there’s the ever-expanding conference circuit to keep both groups, plus a hoard of service providers, racking up craploads of frequent flyer miles. Many of which we’ll never use because we’re pretty darn happy when we actually get to spend an extended period of time at home.

Over the past ten+ years of extensive travel, I’ve developed a few coping mechanisms to manage the rigors of being almost constantly on the go. And after sharing my closet story with a few folks last week who seemed to identify with my temporary travel amnesia a little too much, I came to realize that we could all use a few hacks to make it through 2018 as productively, and sanitarily, as possible. 

So here goes: Meredith’s Top Five Travel Hacks for the Investment Industry

1)   File business cards in your conference name badges. After a conference is complete, I always put the cards I’ve collected into the back of my used name badge. That way, I can remember where I met someone and/or pull contact information for a specific person or company quickly. 

2)   Carry a spare lanyard. If you work for, well, just about anyone, chances are you’ve at one point had a company-branded lanyard. Put it in your computer bag and take it on the road. That way, when you arrive at a lanyard-free conference, or, horror of horrors, at a conference where they expect you to use safety pins to secure your nametags, you’ll be able to spare your look and your clothes while still letting people know who you are. Don’t have a company-branded lanyard laying around? Choose a key service provider and proudly rock their lanyard.

3)   Put one of your business cards in the back of your namebadge while at the conference. So, lanyards are great (see above) but sometimes (nearly all the time if you’re me) those contrary contraptions spend more time making your nametag face your belly button than the person you’re talking to. To ensure that folks can always tell who you are and who you’re with, put one of your own business cards in the back of your nametag while you’re at the event. Frontward or backward, you’ll be good to go.

4)   Get a good business card with a white, non-slick back. Take out your business card right now and grab a pen. Not a good pen, but a crappy conference giveaway pen with a somewhat bajiggety rollerball. Write your name on the back of your card. Can you see it? Does it smear if you rub your thumb across it? Is there room to write your entire name? If you answered “no” to any of these questions, your business card is the bane of people’s existence. How do you expect us to write notes on the back of a card that doesn’t have ample real estate, is too dark, or where the ink rubs off on our clothes or hands? Make it easy for the people at an event to connect with you later with light colored cards on decent card stock.

5)   Know how to sneak in breaks. If you’re a money manager at a conference, you’re there to network. That means anything that says “break” on it in the conference program is showtime for you and your fund. If you’re an investor, your breaks are a little more sacred…if you can get out of the event for a few minutes unmolested. In other words, if you want to get a few minutes to yourself in either case, you’re going to have to plan for it. Money managers, scope out the sessions in advance and figure out one or two you can skip. Note: Do not skip sessions with anyone who has an investment in your fund, who works for your fund, or who could invest in your fund. Investors, you may have to make a break for the break a couple of minutes before a session ends to get to a “safe zone” (bathroom, hotel room, Starbucks). Obviously, you shouldn’t avoid breaks altogether (the best way to find talent is to meet talent!), but skipping out on one out of four in a day may help your sanity level a bit.

Of course, there’s always more where those came from, such as: 

• Don’t ever, ever touch your face during a conference or event…with all the hand shaking, that’s the single best way to get sick.
• When going to the airport or train station after a big event, don’t talk business on your phone or with friends until you know you’re not surrounded by conference goers that you don’t recognize because they are now attired in “real people clothes.”
• And of course, always put your shoes outside the closet door.

I’m sure you have a few tips and tricks of your own, so feel free to leave them in the comments below, but if you follow these simple guidelines, you’ll likely save yourself some headaches and may make even better use of your time on the road again.

Happy Traveling!

Stupid Human Tricks

You know what I miss? David Letterman’s old Top Ten Lists. Hands down, those were my favorite part of late night TV. I know that others have stepped in to try to fill the void. Bill Maher has his “New Rules” and Jimmy Kimmel has the often-entertaining “Mean Tweets” but, to me, David Letterman will always be the original king of the recurring hilarious late night bit.

I mean, who can forget the Top Ten Things That Sound Cool When Said By Snoop Dogg? And the Top Ten Reasons Homer Simpson Should Be President. Or my all-time personal fave: Top Ten California Names.

So in honor of Letterman and out of a wealth of nostalgia that popped up unexpectedly over the weekend, I hereby offer you my own top 10 list…

Top Ten Ways To Alienate A Potential Investor

10. Spend the first 35 minutes of a call or meeting talking about your bio.

9. “I assume you’ve reviewed our pitch book in advance of this call…”

8. Inability to make polite small talk in lieu of laser-like need to focus on your investment product.

7. Interrupting conversations at conferences and/or staring from two feet away until said investor is so uncomfortable they interrupt their own conversation to acknowledge you.

6. Literally not knowing anything about the investor before you approach them.

5. Two words: Wardrobe malfunction (true stories, but better told over adult beverages than in a blog).

4. Ignoring time zones/weekends/holidays when calling.

3. Mansplaining why an investor’s reasoned conclusion is wrong.

2. Lying, and yes, this includes “gilding the lily.”

1. Saying “I’m not going to go through each slide.” And then going through each slide.

Picture This...

(C) 2018 MJ Alts

(c) 2018 MJ Alts

(c) 2018 MJ Alts

(C) 2018 MJ Alternative Investment Research 

Don't Go Changing...

It’s true that I grew up in the deepest South, but I’ve never been a country music fan. Sure, I loved the Oak Ridge Boys tune “Elvira” when I was 11 years old, but who can resist a song with such catchy lyrics as “Giddy up oom poppa omm poppa mow mow”? I soon moved on, however, branching out into Duran Duran by age 12, Howard Jones by age 14, and the Beastie Boys by 16.

Somewhere along the way, I also developed a weird fondness for Yacht Rock. Steely Dan, Christopher Cross and Toto go really well with the captain’s hat I keep far back in the depths of my walk-in closet. Even today I’ll make time to see Yacht Rock Revue if they come to town, just so I can get down with my smooth self. I even kind of liked Billy Joel, despite the fact that he was always perceived as a “Yankee” amongst my Southern peers, and therefore was not in heavy rotation at any of my childhood soirees. I did get my Billy Joel fix weekly while watching Bosom Buddies, but otherwise my exposure to and fondness for the Piano Man is a bit of a mystery.

What isn’t mysterious is why Billy Joel has been on my mind of late. Recent market volatility got me thinking that this may be the moment for hedge funds to shake off eight-plus years of long-only index comparisons and get their groove back.

Of course, the downside volatility in the market proved to be short-lived, so that wish was short-lived, too. And then I saw a report by JP Morgan Prime Finance that indicated hedge funds had increased their long exposure JUST BEFORE the market briefly melted down.

Nooooooooo!

So now I go from hoping hedge funds could engage in a little comeback schadenfreude to hoping they didn’t lose their asses during the first few weeks of February. I guess we’ll know how they fared in a couple of weeks when performance numbers start to trickle in.

In the meantime, here’s my little pep talk for all you hedgies out there, inspired by Billy Joel: Don’t go changing…

Seriously, folks, I know it’s been a tough eight years of redemptions and fee compression and “why can’t y’all outperform the S&P 500” headlines and “sell your private jet” provocations, but you’ve got to stick with it. Otherwise, all those times we’ve (I’ve) patiently explained diversification and correlation and how hedging is a drag in an unchecked bull market but provides valuable insurance in a market correction will be as crap-infused as “We Didn’t Start The Fire.”

Let’s face it, there are a finite number of things you can control in the world of investing, so I implore you to control the one thing you always can: your strategy.

You can’t control the markets and you can’t control your investors and prospects.

The markets will go up and down no matter what you do. They could keep going up (somewhat irrationally in my opinion) for another year or two, or everyone could be in the pooper tomorrow. Investors may redeem when performance is bad and, frankly, they may redeem with the going is good. In 2008-2009, a number of funds that performed well received redemption requests because it was only those funds that had sufficient liquidity to pay redemptions in full. You have zero say in either of those things, so there is likely little point in trying to adjust for them.

I know it must be tempting by now to “go with the flow” and get some relief from what has been a pretty painful period for some, but please, please, don’t go changing. “I took the good times, I’ll take the bad times. I’ll take you just the way you are.”

Source:  https://www.bloomberg.com/news/articles/2018-02-08/hedge-funds-dug-into-stocks-right-before-the-market-went-haywire

You Might Be An Emerging Manager If....

As someone who was born, raised, and has spent the majority of my life in the South, one of the things I’m required to love, besides SEC football, is Redneck Humor. From Trae Crowder, Corey Ryan Forrester, Roy Wood Jr., and Drew Morgan today to Ron White and Jeff Foxworthy a decade or so ago, I love poking fun at myself and laughing at my fellow rednecks. I can reliably drive on the backroads of Tennessee and come up with “You may be a redneck” moments every few miles, and my friends and me are up for our own hillbilly kudos when summer reliably finds us in a backyard with a baby pool and some PBR.

I even have a personal favorite “you may be a redneck joke” that makes me laugh every time I tell it:

“You may be a redneck if you think a tornado and a divorce have a lot in common – ‘cos either way, someone’s losing their trailer.”

(2) 123rf.com

Bwhahahahah!

A recent trip to the WellRED comedy show in Nashville got me thinking about all the ways in which, I as a redneck, can be defined. It also got me thinking about how we categorize and group other people, places and things in an attempt to make cosmos out of chaos.

There are few places in the investment world where there is more confusion than in the world of emerging managers. Ask two people what constitutes an emerging manager and you’re likely to get two completely different answers. Is it small funds? How small? Is it diverse funds? Ownership or fund management? Is it new funds? What’s the cut off? Does the manager need to be local? Does the manager need to be certified? What counts as a minority? Frankly, I find that emerging managers swirl in their own vortex of uncertainty.

So to help everyone out a little bit, I thought I’d use my 11+ years in the emerging and diverse manager space to create a handy-dandy checklist to determine whether or not a fund may be emerging. After all, it seemed like a great project for a winter weekend when 0.5 inches of snow has me pinned inside the house like the Southerner I am.

You Might Be An Emerging Manager If…

…you have less than $2 billion in AUM and manage long-only assets. Although this may seem reasonable on the surface, since the largest long-only fund managers may control trillions of dollars (with a “T”), it may still be a little large. In an August 2017 study by Richard B. Evans, Martin Rohleder, Hendrik Tentesch, and Marco Wilkens looked at 3,370 separate accounts (“SMAs”) managing $3,671 million and found those in the 10th percentile managed $5.38m, the 50th percentile managed $128m and the 90th percentile managed $1,470m, with a range of accounts from 3 to 15 to 305, respectively. In line with research about mutual funds, the authors found better performance in the smaller SMAs, in part due to liquidity constraints and market impact costs, but also due to increasing management complexity as the number of accounts increased. Take a look at the research if you’ve not seen it yet.

…you have less than $1 billion, and really more like <$250 million, in hedged AUM. (There are only about 700 funds with over $1 billion, so if you’ve gotten to that milestone, beating out 9,300 of your peers, I’d say you’d emerged).

…your firm is owned at least 51% by women or minorities for official certification, or has 33% women or minority ownership if you want to get a bigger crop of funds from groups that historically have had less assets with which to launch funds, and therefore may have partnered with firms or individuals that dilute the ownership structure.

…your fund is managed by women or minorities. This can be key for investors who are looking for cognitive and behavioral alpha (or differentiated networks for private asset funds), and may be more important to some than ownership status.

…the minority ownership or fund management in question is done by a U.S. citizen.

…the minority ownership is not by fungible personnel who were given ownership status simply to qualify for MBWE status (wives, daughters, back office personnel, figureheads).

…the fund is less than three years old or is a Fund I, II or III.

…the fund is not part of a mega asset management complex.

…the fund meets the above requirements and is located in the same state as the certain potential investors (Illinois, Pennsylvania, etc.)

…the fund is owned by veterans or disabled veterans.

Now, obviously there are all kinds of competing definitions out there, and there are also practical implications for investors, particularly larger ones. For example, if an institution manages billions of dollars (with a “B”), it may be difficult for them to look at the smaller end of the spectrum of emerging funds without having to assemble a massive portfolio of managers. Still, I hope these definitions may resonate with folks out there who are looking to capture some structural, cognitive and behavioral alpha. They may be a more successful investor if….

Sources: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2933546 Preqin, SBA 

Investors and Fund Managers: Naughty or Nice?

NB - I have nothing against crypto and quant funds, honestly, but a little variety is always nice. 

The Poetry of Investing

It seems as if everyone has been pretty focused on Tweets, hashtags, and the general dumbing down and coarsening of communication of late. So I thought this week I'd inject a little culture into my investment blog. What if investors and fund managers could only think or talk in Haiku? The sentiments would likely remain the same, but the delivery might be much more civilized. So here you go: investor and manager haikus. Feel free to add your own in the comments section.

Investor Haikus

Seasons change, my phone

Keeps ringing. The same number

Calls. Persistent funds.

Not the best idea

To use diligence checklist

On the kids’ playdates.

Must I disclose this

Doughnut to compliance or

Can I eat it all?

Can’t wait to discuss

Fees with the trustees at our

Next board meeting. Yay.

I don’t want to shake

Hands while grabbing paper towels

In the bathroom. Gross.

 

Manager Haikus

Fall becomes Winter,

And I find myself stuck in

Endless diligence.

Performance is great!

This sector is hot! So why

Don’t people subscribe?

Do you want info

On my investment fund? No?

Maybe tomorrow?

Families, pensions,

High net worth peeps, endowments.

Lather, Rinse, repeat.

Competitive edge?

It’s our process and people!

Oh. You’ve heard that one.

Investment Wisdom Through a Temporal Paradox

It seems like only yesterday that I started my career in alternative investing. Actually, it was nearly 20 years ago, a fact that hit home as I sat this weekend facing a birthday cake that was more inferno than Instragramable. I thought back to my first job at Van Hedge Fund Advisors as an entry-level hedge fund analyst in 1998 and wondered where the time had gone, when my eyesight went to hell in a handbasket, and how random it was that a “want ad” advertisement led me into what I think has been a pretty good career run.

I also thought back on how much I didn’t know at the time. I had researched stock transfers and HNW individuals during a stint at Vandy, but I honestly knew crap all about the industry or the funds I had been hired to research. So I spent some time over the weekend, in between massage appointment, birthday food and champagne binges, and a mild mid-life crisis, thinking about the advice I would have loved to have had in my salad days in the industry. So without further ado, and in honor of my four-plus decades here on Earth, here are the top four things my current self would love to tell my young self, assuming I could do so while avoiding any universe ending temporal paradoxes.

4) It’s better to know what you know not – As I mentioned, when I got my first job in the industry, I knew literally nothing. I was a sponge. I asked a ton of stupid questions. I read everything and sat in on every meeting that would have me. I felt like a complete moron at times, but I learned a bunch of useful stuff. I also observed other people in the industry and realized that there were four basic categories of alternative investment professionals: Those that knew not and knew they knew not. Those that knew not and knew not they knew not. Those that knew and knew not they knew. And those that knew and knew they knew. I’ll let you guess which groups tended to do better over the long haul.

3) Most hedge funds don’t blow up – I started my job with Van in May 1998, mere months before Long Term Capital Management blew up. When that happened, I freaked the hell out. I thought I had made the worst career move ever and wondered aloud, in front of the CEO of the firm (did I mention I was a moron?), what I had signed up for. In the intervening years, I’ve noted that hedge fund “deaths” remain fairly steady year over year (between 900 and 1,000 funds “die” in any given year), and that the vast majority of these closures are like watching the world’s slowest moving train wreck. You can see the bad performance piling up. You can see assets trickling out. And usually over a period of a year or more, the fund either converts to a family office or announces “there’s no good opportunities in the strategy anymore” and shuts its doors. Sure there have been spectacular blow outs in my 20 year tenure (LTCM, Manhattan, Maricopa, Bayou, Madoff, etc.), and some of these have been frauds, but generally speaking, with some added diligence and a decent redemption policy (and reasonably liquid assets) you can get out of the way before becoming pink mist.

2) Unhedged index returns are about as useful a one legged man in a butt kicking contest - About once per quarter, I see a headline either asking if the latest hedge fund liquidation means hedge funds are going extinct, or announcing that hedge funds “aren’t dead yet,” which always makes me start talking in my best Monty Python voice. Look, I get it. There’s pressure on fees. Performance hasn’t been awesome during this remarkable market run, but then again, that’s really not the point. I used to freak out when people challenged me with the S&P 500 or, back in the day, the NASDAQ’s returns. But then I realized that index returns don’t mean bupkis. Investors who are looking for pure beta should invest in beta. Investors who are looking for diversification or hedging or assets off the beaten path should consider hedge funds. Don’t believe me? Despite underperforming the indices, a Preqin survey showed 45% of hedge fund investors had matched their expectations through June. Investors that want to get it, get it.

1) A good review and understanding of leverage, liquidity, concentration, transparency, complexity and hedging will save you from strategy blunders 90% of the time. The rest of the time you need to understand the manager’s psyche (are they confident or overconfident or a sociopath) and/or specific market scenarios to avoid getting your butt handed to you, performance-wise. Spend your time on evaluating these factors and you’ll have pretty good luck picking funds. If you get too bogged down in checklists, you can miss the big stuff.

Oh, and a few to grow on: Never eat salad before you give a talk. You’ll never look as good in a bathing suit as you do at 20-something so go to the pool at conferences and quit being a wuss. Never order the chardonnay at a conference cocktail party unless you want your tongue to literally itch from all the oak. Don’t overuse “reply all” unless you really want to piss people off. Don’t be afraid to tell managers and investors no. And if a return steam seems impossible to achieve, run. 

Jeopardy Baby!

I happened to catch a re-run of Saturday Night Live the other day, and it just happened to be an episode with Sean Connery losing big (winning big?) at Jeopardy! with Alex Trebek. After I got done having my beverage shoot out my nose when this category came up...

(c) Saturday Night Live

...I figured what the investment industry really needs is our own Jeopardy! board. So here ya go! Enjoy! 

(c) 2017 MJ Alts