Absolute return? Investors need alpha because beta isn’t reliable. A portfolio of long only relative return stock and bond funds can lose money over extended periods and is too risky anyway. Fortunately there is a solution – alpha from the skills of the world’s best fund managers. It would be good if beta does eventually perform but we need the “hedge” of alpha for when it doesn’t. Diversify away volatility and risk with return sources that don’t depend on the economy to make money.History is a powerful persuader but poor predictor. The 20th century...
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Active versus passive? There are NO passive investment strategies. Active is the only choice in the REAL world since “passive” requires active decisions by index construction firms on which securities to include. Investors also make an active decision as to which “passive” benchmark to track. If you think the best stockpickers work at Standard and Poor’s, invest in a “cheap” fund of the stocks they ACTIVELY select. If you don’t like that risk, avoid it. Why tie up capital in a manager’s 500th best idea? Do you really think someone with the...
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Time is not money. Technology is money. The best way to predict the future is to invest in it. The only certainty is change. Technology is affecting how we invest and innovation impacts everything. Good hedge funds are inventing better ways to make money and disrupting the traditional world that has failed people so dismally. Successful investing requires flexibility so it makes sense to keep up with trends. NEW ideas have changed OLD investment strategies. Creative destruction doesn’t only apply to business innovation it also applies to investment innovation. There has been plenty of...
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Bear markets for beta are bull markets for alpha. It’s always an OPPORTUNITY MARKET for absolute return. Recently short selling has been performing well and stock indices have erased ALL last year’s gains. Investors have not received the alleged equity risk premium for so long but then stocks don’t read economics textbooks. Not many people can afford to risk their retirement savings hoping for REALITY to catch up with dubious THEORY. The “panic of 2007″ will worsen in 2008.Though currently above 13,000, I would be amazed if the Dow and Nikkei are still above...
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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...
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Bernie Madoff “managed” customer accounts as a stockbroker. He did not run a hedge fund and had no connection whatsoever to the hedge fund industry. His firm was “regulated” and fraud has been illegal for centuries. Real due diligence itself is an alpha source. Wide manager diversification with many strategies is mandatory for risk averse investors. Why do some people think the scandal has anything to do with hedge funds? It was always odd that Bernie didn’t set up a hedge fund if he was so good. No incentive fees, no prime broker, no proper auditor and no...
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Hedge fund drawdown? First rule of risk management – if it can happen it will happen. Recently we have seen excellent returns from many hedge funds, hard times for lower quality hedge funds but MUCH worse from long only equity and credit. Skilled managers don’t always make money but they do have fewer, milder and shorter drawdowns than traditional long only that doesn’t even attempt to manage risk, reduce exposures or preserve capital. As a risk averse conservative investor I’ll stick with 100% in hedge funds. It’s the PRUDENT approach. Hope for the best but...
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Best hedge fund? Just returned from a due diligence visit to the best ever hedge fund. On the way I saw some black swans and ate at a restaurant that had run out of rice. Minor observations can signal major opportunities. Volatility is never contained and reverberates across ALL asset classes. Many commodities have risen but wide fluctuations do not bode well for economic stability. How to define “top fund”? AUM? A list of the best funds is very different to a list of the biggest. Historical performance? Future outlook? Highest past risk-adjusted returns? Below is the chart of a...
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High frequency trading? Ironic the highest LONG TERM returns came from SHORT TERM strategies. My preferred holding period is forever but it’s rarely feasible and NEVER optimal. So that is why I consider having a substantial allocation to HFT to be essential. Market volatility, creative destruction, industry innovation and economic instability are always present. Low frequency trading doesn’t diversify enough so investors also need high frequency strategies. New time horizon alphas reduce risk. Invest across the entire holding period continuum.It’s much SAFER to hold a stock...
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Emerging markets have done well. Most investors used to focus on “developed” nations due to the Asia crisis, Russia default and 1990s bubble. They missed high returns “overseas” but endured the uncompensated risk of “safer” home markets. I try to buy when securities ANYWHERE are cheap and sell when expensive but most emerging and frontier newbies do the opposite. That’s great since they make more alpha available. No “lost decade” for truly GLOBAL portfolios that ignore absurd “global” weightings. Anyone that treats emerging...
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