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November 30, 2011 at 18:32
Bull market? Financial planning is about achieving client objectives and good hedge funds have delivered superbly. Over 3,000 hedge funds had POSITIVE returns in 2008 but zero long only equity managers. It’s best to invest in quality so I’ll stay in the safe haven of skill-based strategies NOT asset classes. Every sophisticated institution I deal with is INCREASING investment in alpha. Good riddance to beta repackagers pretending to be hedge funds. The hedge fund industry is stronger than ever despite many “experts” predicting its demise…again.
2008 was a GREAT year for truly diversified portfolios. Volatility creates opportunity. The future prospects for good hedge funds are outstanding. Bonds have outperformed stocks for a long time but skill has done far better. The SKILL premium exists but the equity RISK premium? Naive and stupid to expect to be paid for exposure to risky asset classes over the long term. A fall into the ditch makes you wiser and people prefer managers that avoid big losses. The epochal change is from long only assets to long short strategies.
Stock indices tracked by “passive” managers might get back to where they once were. But even if I was certain that in 2030 the Dow, Nikkei, DAX and FTSE will all be above 100,000, I still won’t be gambling on long only equity. I know good hedge funds will have HIGHER risk-adjusted returns. If those benchmarks turn out to be LOWER than today, good hedge funds will also have outperformed. Quality hedge funds are a win/win for investors wishing to RELIABLY grow and preserve their capital.
Recessions are bad for beta but good for alpha. Diversified ROBUST hedge fund portfolios beat stock benchmarks on a risk-adjusted basis over all time horizons. Long only equity funds squandered a disasterous -40% in 2008 and remain negative for the decade. Despite a drawdown, even an index of “all” hedge funds produced +22% alpha compared to the stock market. The biggest risk most investors take is the outdated infatuation and uncompensated mania for the unhedged stock market.
The very rare “hedge fund” that imploded receives saturated media coverage but there have not been many articles on the managers that made +20%, some over +100%, last year. Change is a constant in finance and doesn’t faze those with genuine acumen. The “average” fund manager is just that…AVERAGE. The “indices” indicate very little with such wide performance dispersion.
The demand for absolute return is growing unlike that unrequited love affair with stocks that has jilted so many investors. The long only luddites hope risk appetite will rise again but skilled long/short strategies offer a smoother ride. “Buy and hold” has been an acarpous wasteland for too long. Like many investors, I NEVER have an appetite for such risky speculation.
But I do have the simple yet novel requirement that fund managers make money in USEFUL time frames without devastating drawdowns. Anyone who regularly meets with proper hedge funds and bothers to look closely at the performance data concludes that the more conservative an investor’s risk tolerance, the MORE of their portfolio they need in proper hedge funds. Long only equity losses of -50% are beyond any acceptable level of risk with +100% needed just to get back to breakeven. The empirical evidence PROVES the lower risk and higher performance of good hedge funds. Many of the largest institutional investors are EXPANDING their hedge fund investments. Individual investors would be prudent to follow.
80% of alpha is made by 20% of managers. The Pareto principle governs hedge funds too. There is nothing unexpected about recent “aggregate” numbers and good hedge funds continue to produce EXACTLY what they promised – uncorrelated absolute returns with capital preservation. Portable alpha redistributes from the unskilled to those with an edge. Back in 1970, 2 out of 3 “hedge funds” shut down but the following 40 years saw a LOT of growth. 1994 and 1998 were also supposedly the “end” of hedge funds. The current blip is another temporary timeout in the ongoing expansion of the hedge fund industry. Any money withdrawn creates more space for smarter investors.
The ONLY hedge for a long is a short. Why should bull markets or bear markets affect the capital growth of a truly diversified portfolio? Asset allocation has not met the expectations of investors. As this decade showed, if you own lots of stocks, bonds, real estate, private equity and commodities you are NOT sufficiently diversified. Long only risky assets are correlated, particularly in bear markets. A robust portfolio requires substantial investment in orthogonal skill-based strategies that do not depend on rising markets or a strong economy for performance. Diversification with lots of different strategies is critical to optimal portfolio construction for the long term.
Not investing in any stock or corporate bond because of Bernie Ebbers would be dumb so why are some arguing for avoiding absolute return strategies because of a fraudulent stockbroker called Bernie Madoff? That would be almost as silly as eschewing honest funds of funds that actually conduct due diligence because of Bernie Cornfeld. One of the best hedge fund managers was Bernie Baruch. If only we had access to his perspicacity today like President Roosevelt did during the 1930s depression. It is hazardous to rely on economists to advise on the economy and we shall see if the PPIP succeeds. Is government leverage the solution to ineffective use of leverage?
Long only funds are not for those who dislike riding the stock market rollercoaster. Long term absolute returns are the raison d’etre and why anyone would invest in an AVERAGE hedge fund is incomprehensible to me. It’s almost as weird as wasting time and money in an “average” stock. With the right evaluation techniques, investors can do a LOT better than “alternative beta” just as they can with market beta. Traditional 60/40 stocks and bonds just doesn’t work. Keep it simple – overweight alpha in your portfolio. It’s safer and more reliable. Don’t bet on beta and avoid any “hedge funds” or “mutual” funds that depend on it.
The redemption of hot money creates more room for investors who understand that smaller AUMs lead to larger alphas. Poor quality “hedge funds” that shut down will simply be replaced by better new ones. The “free lunch” of “passive” index funds has cost investors too much money for far too long. The CULT of equity and the credit cataclysm have devastated beta-centric portfolios. The CURE is to rebalance in favor of investment skill. Not long from now hedge funds will be a CORE component of all investment portfolios. Risky asset classes are too volatile and need to be hedged.
Good hedge funds continue to generate the performance that investors need and have done that throughout the equity tumult and credit induced economic turmoil. There is a terrific pipeline of NEW strategies and hedge funds coming. Did the dot.com implosion end internet usage? For each Netscape, Excite and Pets.com along came a Google, Facebook and Twitter. Creative destruction and innovation drives investment technology too. Good riddance to the dinosaurs; welcome to evolving ways of making money. Many investors are aligning their interests with talented and incentivized fund managers that focus on risk-adjusted returns.
The stigma of high sigma renders unhedged equity funds unsuitable for those who seek reliable performance at low volatility. The blandiloquence of the index fund aficionados with their “cheap” fees but expensive losses has not helped investors. The FACT that equities have underperformed bonds over such long periods refutes the “Nobel” prize winning dogma. Stocks constitute an opportunity set of securities to buy and short sell. The mythical “target=_blank>Modern portfolio theory doesn’t need a tweak; it needs an extreme makeover. Any manager that loses -50% TWICE in a decade does not merit a place in any risk averse portfolio so sayonara to long only “passive” funds. Speculating on the noxious notion that stock markets “rise over time” isn’t suitable for those who need performance in sensible time frames. Even in bull markets the RETURN ON RISK of index funds is very low.
Bull market? Yes it’s always a bull market for investment EXPERTISE. Traditional investors urgently need to access that talent. A SUBSTANTIAL allocation to diversified skill based absolute return strategies is necessary for risk averse investors.
2008 was a GREAT year for truly diversified portfolios. Volatility creates opportunity. The future prospects for good hedge funds are outstanding. Bonds have outperformed stocks for a long time but skill has done far better. The SKILL premium exists but the equity RISK premium? Naive and stupid to expect to be paid for exposure to risky asset classes over the long term. A fall into the ditch makes you wiser and people prefer managers that avoid big losses. The epochal change is from long only assets to long short strategies.
Stock indices tracked by “passive” managers might get back to where they once were. But even if I was certain that in 2030 the Dow, Nikkei, DAX and FTSE will all be above 100,000, I still won’t be gambling on long only equity. I know good hedge funds will have HIGHER risk-adjusted returns. If those benchmarks turn out to be LOWER than today, good hedge funds will also have outperformed. Quality hedge funds are a win/win for investors wishing to RELIABLY grow and preserve their capital.
Recessions are bad for beta but good for alpha. Diversified ROBUST hedge fund portfolios beat stock benchmarks on a risk-adjusted basis over all time horizons. Long only equity funds squandered a disasterous -40% in 2008 and remain negative for the decade. Despite a drawdown, even an index of “all” hedge funds produced +22% alpha compared to the stock market. The biggest risk most investors take is the outdated infatuation and uncompensated mania for the unhedged stock market.
The very rare “hedge fund” that imploded receives saturated media coverage but there have not been many articles on the managers that made +20%, some over +100%, last year. Change is a constant in finance and doesn’t faze those with genuine acumen. The “average” fund manager is just that…AVERAGE. The “indices” indicate very little with such wide performance dispersion.
The demand for absolute return is growing unlike that unrequited love affair with stocks that has jilted so many investors. The long only luddites hope risk appetite will rise again but skilled long/short strategies offer a smoother ride. “Buy and hold” has been an acarpous wasteland for too long. Like many investors, I NEVER have an appetite for such risky speculation.
But I do have the simple yet novel requirement that fund managers make money in USEFUL time frames without devastating drawdowns. Anyone who regularly meets with proper hedge funds and bothers to look closely at the performance data concludes that the more conservative an investor’s risk tolerance, the MORE of their portfolio they need in proper hedge funds. Long only equity losses of -50% are beyond any acceptable level of risk with +100% needed just to get back to breakeven. The empirical evidence PROVES the lower risk and higher performance of good hedge funds. Many of the largest institutional investors are EXPANDING their hedge fund investments. Individual investors would be prudent to follow.
80% of alpha is made by 20% of managers. The Pareto principle governs hedge funds too. There is nothing unexpected about recent “aggregate” numbers and good hedge funds continue to produce EXACTLY what they promised – uncorrelated absolute returns with capital preservation. Portable alpha redistributes from the unskilled to those with an edge. Back in 1970, 2 out of 3 “hedge funds” shut down but the following 40 years saw a LOT of growth. 1994 and 1998 were also supposedly the “end” of hedge funds. The current blip is another temporary timeout in the ongoing expansion of the hedge fund industry. Any money withdrawn creates more space for smarter investors.
The ONLY hedge for a long is a short. Why should bull markets or bear markets affect the capital growth of a truly diversified portfolio? Asset allocation has not met the expectations of investors. As this decade showed, if you own lots of stocks, bonds, real estate, private equity and commodities you are NOT sufficiently diversified. Long only risky assets are correlated, particularly in bear markets. A robust portfolio requires substantial investment in orthogonal skill-based strategies that do not depend on rising markets or a strong economy for performance. Diversification with lots of different strategies is critical to optimal portfolio construction for the long term.
Not investing in any stock or corporate bond because of Bernie Ebbers would be dumb so why are some arguing for avoiding absolute return strategies because of a fraudulent stockbroker called Bernie Madoff? That would be almost as silly as eschewing honest funds of funds that actually conduct due diligence because of Bernie Cornfeld. One of the best hedge fund managers was Bernie Baruch. If only we had access to his perspicacity today like President Roosevelt did during the 1930s depression. It is hazardous to rely on economists to advise on the economy and we shall see if the PPIP succeeds. Is government leverage the solution to ineffective use of leverage?
Long only funds are not for those who dislike riding the stock market rollercoaster. Long term absolute returns are the raison d’etre and why anyone would invest in an AVERAGE hedge fund is incomprehensible to me. It’s almost as weird as wasting time and money in an “average” stock. With the right evaluation techniques, investors can do a LOT better than “alternative beta” just as they can with market beta. Traditional 60/40 stocks and bonds just doesn’t work. Keep it simple – overweight alpha in your portfolio. It’s safer and more reliable. Don’t bet on beta and avoid any “hedge funds” or “mutual” funds that depend on it.
The redemption of hot money creates more room for investors who understand that smaller AUMs lead to larger alphas. Poor quality “hedge funds” that shut down will simply be replaced by better new ones. The “free lunch” of “passive” index funds has cost investors too much money for far too long. The CULT of equity and the credit cataclysm have devastated beta-centric portfolios. The CURE is to rebalance in favor of investment skill. Not long from now hedge funds will be a CORE component of all investment portfolios. Risky asset classes are too volatile and need to be hedged.
Good hedge funds continue to generate the performance that investors need and have done that throughout the equity tumult and credit induced economic turmoil. There is a terrific pipeline of NEW strategies and hedge funds coming. Did the dot.com implosion end internet usage? For each Netscape, Excite and Pets.com along came a Google, Facebook and Twitter. Creative destruction and innovation drives investment technology too. Good riddance to the dinosaurs; welcome to evolving ways of making money. Many investors are aligning their interests with talented and incentivized fund managers that focus on risk-adjusted returns.
The stigma of high sigma renders unhedged equity funds unsuitable for those who seek reliable performance at low volatility. The blandiloquence of the index fund aficionados with their “cheap” fees but expensive losses has not helped investors. The FACT that equities have underperformed bonds over such long periods refutes the “Nobel” prize winning dogma. Stocks constitute an opportunity set of securities to buy and short sell. The mythical “target=_blank>Modern portfolio theory doesn’t need a tweak; it needs an extreme makeover. Any manager that loses -50% TWICE in a decade does not merit a place in any risk averse portfolio so sayonara to long only “passive” funds. Speculating on the noxious notion that stock markets “rise over time” isn’t suitable for those who need performance in sensible time frames. Even in bull markets the RETURN ON RISK of index funds is very low.
Bull market? Yes it’s always a bull market for investment EXPERTISE. Traditional investors urgently need to access that talent. A SUBSTANTIAL allocation to diversified skill based absolute return strategies is necessary for risk averse investors.
by Veryan Allen. Copyright 
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