Even if the songs tell us it's the most wonderful time of the year, when bells will be ringing and children are singing, for many emerging fund managers, the holidays may simply be the end of another  difficult year of fundraising. To help you navigate any holiday season depression and just maybe put things in perspective a bit, I've put together a guide to managing the 5 Stages of Emerging Manager Grief. I hope it (combined with a lovely hot buttered rum) eases you through the holiday season. 

 (C) 2016 MJ Alts

(C) 2016 MJ Alts

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

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

 

Every time I turn around, I find a manager looking for seed capital. Many are frustrated with what I like to call "second dollar syndrome" - the fact that everyone seems happy to be the second dollar in your fund, but few want to commit the first dollar - and dream of a seed investment as a way out of the fund raising drudgery.

If you're on the early-stage capital trail, it can be helpful to understand the nuance of seeding and acceleration capital so you know better when to hold 'em and when to fold 'em, know who's 'bout to walk away and who's there to fund. So here are a few pointers that apply to seed and accelerator capital (even if it just says seed in some spots for brevity's sake) that I hope lead you to your own vat of miracle grow.

 (c) 2016 MJ Alts

(c) 2016 MJ Alts

Dear MJ:

About 10 years ago, I became involved with a very special investment. I had my eye on it for a while, you see, and had noticed things about this investment that really appealed to me. It was different than the other investments I had known, less restricted, and, dare I say it, maybe even a little uninhibited. But it seemed to always be there for people when the markets were down, and that really turned me on.

I started looking into getting involved with this investment and, based on what I was able to research, learned that others had a generally good, though occasionally volatile, relationship with investments similar to mine. I saw how happy those family offices and high net worth individuals were over the long term. I watched their investments support them through the tech wreck, and I wanted a that special relationship, too.

But as much as my heart screamed “invest!” my head, and the heads of those around me urged caution. So I gave in, but not without a few stipulations. The investment would have to change, you see. Not the things I loved – no, I wanted the long-term happiness and the unwavering support. But I didn’t want our relationship to be volatile. And the freedom, well, that made me a little nervous, too. And I really wanted my friends to like my investment, too. So I asked it to clean itself up, move into better digs, and I insisted it hire people to ensure it didn’t step out of line. I even hired people to monitor it, too. And several people close to the investment? Well, they promised it would never hurt me.

Now, 10 years later, our relationship has changed. My investment doesn’t make me as happy as it should. It’s like it’s not even trying.  Some of my friends have become disillusioned with my investment, and a few are even pressuring me to dump it. They argue that I pay for everything and am not getting much out of it in return.

So, Dear MJ, what’s an investor to do?

Signed,

Hedged Up

My Dear “Hedged Up”:

I’ll be honest: I’ve received quite a few letters like yours lately. Egged on by a strong market, vociferous press coverage and contentious board meetings, there’s a lot of fed up investors all over the world right now wondering how we got here. I’m not entirely sure I have the answers, but as an investment voyeur for more than 18 years, I can definitively say that the investment you fell in love with? Well, it’s changed.

In the late 90s up through most of the tech wreck, I was working at Van Hedge Fund Advisors, which some of you may remember as one of the first consultants that worked with investments like yours. At that time, our proprietary database tracked just under 5,000 funds. Some were good. Some were bad. Some ended up being frauds. At least one, Long Term Capital Management (“LTCM”), blew up spectacularly during my first six months on the job.  

Our clients were primarily high net worth individuals and small family offices. We worked with some endowments and wealth management firms, but, in general, the client base was not institutional. In fact, per Citibank, only $125 billion of hedge fund assets under management (or roughly 20%) were institutional prior to 2002.

Returns prior to LTCM were reported by fund managers to Van Hedge primarily quarterly, changing to monthly starting in 1999. By 2000, all of our funds were reporting at least monthly. After the market started melting down, most of our key hedge fund relationships also provided weekly estimates, although many portfolios remained relatively opaque. Funds had wide latitude to do what they wanted when they wanted, and the words “strategy drift” had not gained traction.

Staff was lean. The term “two guys and a Bloomberg” was used to describe funds and it wasn’t meant as an insult. The SEC periodically audited those funds registered as investment advisors, which most were not, and overzealous compliance had yet to become the norm.

Performance, on average, was quite strong, although more than a few “long/short equity” funds were more than 90% net long, capturing the returns of the “greatest bull market in history.” When the market began to sell off, hedge funds in general also flourished (although those 90% net long funds lost their butts). “If there is one thing at which hedge funds excel, it is in avoiding highly publicized, highly priced investments that indexes, by virtue of their construction, must own. Most hedge funds shone during the 2000-02 technology sell-off,” noted even a September 2016 article on the infamous “Buffett Bet” against hedge funds.  

Was the relationship between funds and investors perfect?

Hell. No.

Did fund managers occasionally fake their own kidnappings or end up on 20/20?

Hell. Yes.

But it was what it was. And what it was spawned the investment profile you were so attracted to initially.

And now?

Well, now we’re in an entirely different ball game. The amount of money, the type of investor, the expectations, the regulations, transparency, the number of managers….well, they’re ALL different. And it would be ludicrous to think that those wholesale changes would not have an impact on your investment individually, and on the industry overall.

So what’s changed?

Assets Under Management – The size of the hedge fund industry more than doubled between 2002 and 2007. It grew from $625 billion to $1.8 trillion in five years per Citibank, and the main driver of that growth was some $750 billion in assets poured in by institutional investors. That’s a lot of cash for any industry to eat without some serious indigestion.

Number of Funds – The number of funds increased from the Van Hedge database of 5,000 to the widely accepted industry average of 10,000 between 2002 and 2007. That’s a helluva lot of new funds. Wannabe fund managers flocked to the hedge fund industry to capture higher than mutual fund fees and assets flowing like champagne at a P-Diddy party. And, because hedge fund-land ain’t Lake Woebegone, every fund is not above average. Some of those new entrants struggled to put up decent performance numbers. Prior to 2010, low barriers to entry meant those funds could bootstap a business for years with friends & family funds and few expenses. Now those funds are getting shaken out of the industry. Frankly, that probably needs to happen – those funds aren’t helping industry averages or its street cred. But, overall, I still believe there is a tremendous amount of talent in the hedge fund industry. You just may have to diligence more frogs to find it.

Type of Investors – The HNW individuals and family offices Van Hedge dealt with didn’t really care if they had daily transparency, if a manager invested in something off the beaten path, or whether there was a dedicated CCO, COO, and CFO at the fund. SEC registration wasn’t an issue, nor was an “institutional quality” back office. Concentration limits and stop losses were nice, but not necessary. Was this perhaps a little naive and potentially even a little dangerous for investors? Um, yeah. Sometimes you were the windshield and sometimes you were the bug. But, it has to be said, the expectations, controls, investing parameters and infrastructure that was expected by institutional investors starting in 2007 has a cost associated with it, both in terms of actual expenses (which reduce returns) and in lizard-brain opportunity costs. In today’s investing environment, you may never be the bug, but you’re also a lot less likely to be the windshield.

Marketing – In my early days at Van Hedge, hedge funds were pretty honest about what they were. Many fund managers did their own marketing and stressed strategy, smarts, nimbleness, and a willingness to adapt, adjust, and evolve. Over time, that messaging evolved. The concept of “absolute return” was introduced and almost immediately bastardized. I will never forget a business trip to Japan post-2008 when many of the investors I talked to had been sold hedge funds as a fixed income substitute. WT-Actual-F? Absolute return was never meant to imply that an investment absolutely generates positive returns every month, quarter, year or rolling period, and those that marketed that way did the industry, and investors, a tremendous disservice.

In short, the investment you fell in love with, Dear Reader? It HAS changed - in part, because you asked it to, in part because it was a victim of its own success and in part because expectations on both sides of the fence became disconnected from investment reality.

The question for you, Hedged Up, and for all of those who are disappointed with their “absolute return” portfolio is this: Can you remember what really attracted you to the investment in the first place? Was it the performance? Was it the diversification? Was it the correlation? Was it the belief that you’d never know a single moment of return sadness? Once you’ve figured that out, Dear Reader, you can take a step back from your former investment love and see if there are ways to achieve those goals within today’s hedge fund landscape. I just bet you can find true investment love this time..

Sources: http://www.citibank.com/icg/global_markets/prime_finance/docs/Opportunities_and_Challenges_for_Hedge_Funds_in_the_Coming_Era_of_Optimization.pdf

http://news.morningstar.com/articlenet/article.aspx?id=769179

Posted
AuthorMeredith Jones

It's often quite amusing to me to chat with friends and associates outside of the investment industry about the investment industry. The vision that many folks have about the typical hedge funders' day-to-day existence is one part conspiracy theory, two parts lies and debauchery and a final part douchebaggery. So, to help clear up some of the most common misconceptions about working in alternative investments (specifically hedge funds), I thought it might be helpful to create a simple visual aid separating hedge fund fact from fiction. May this give you a giggle as you attempt to re-acclimate to work after the long weekend. 

Please note: I don't think that the hedge fund industry is in imminent danger of going away, but I do think that, like in Westeros, there will likely be some carnage before we make it through this round of poor average performance and fee, tax and regulatory pressure. Oh, and I don't own any of the images above. And finally, you may have to be 40+ or a bone fide cinematic geek to understand some of the references (Hint: Trading Places, Dr. No, Hitch), but I think you'll get enough of the picture. That is, hedge funds: More PowerPoint than "power suit, power tie, power steering." 

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/

 

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

 (c) 2016 MJ Alts

(c) 2016 MJ Alts

With hot weather upon us, more folks out of the office, and a truncated conference schedule, it's easy to get frustrated with the capital raising process. Before you start hating the players *and* the game, make sure you're not committing any capital (raising) crimes and putting your own asset raising efforts in the pokey.

(c) 2016 MJ Alts

Posted
AuthorMeredith Jones

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.

Posted
AuthorMeredith Jones