Story of the day (month?) is that SWF’s are coming in to fill the funding gaps for many hedge funds and FOFs.  What I find amusing about this is the implication that these SWF’s are flush with cash from rising commodities prices.  Throug the lens of our condescending-developed-nation goggles, there is an element of colonial distrust.  An accusation of sorts: “well they’re all just overblown banana republics with economies that are dependent on natural resources”.

Another interesting though less obvious implication is that the money SWF’s have to invest now is the same wealth developed nations (a) lost in their own economies thanks to commodities/real estate speculation (b) invested in foreign infrastructure projects (c) derived from asymmetric trade agreements.  More succintly, developed economies lost wealth that found its way into less-developed economies who, having nothing better to do with their windfall, are reinvesting it in developed markets.

Which makes tons of sense.  (no, it doesn’t).

The problem is, you can’t sit on $700 bn of cash.  PE firms are dealing with that same issue right now.  You need deals, you need projects, you need opportunities.  And when you are Nigeria or China or Abu Dhabi, it’s hard to find a place where you can invest.  Local markets are subject to a certain degree of irregularity (see the shanghai index) and are fairly small-cap.  There are only so many Trump-branded oasis hotels that you can build.  At some point, you have to make a stab at traditional investing.

The problem with the influx of SWF is not a political, moral, or market issue.  It’s just evident that these funds aren’t capable of managing the amount of assets for which they are currently responsible.

Instead of another massive stake in a bank or indoor ski slope, if these nations want a vanity acquisition, they should hire the world’s best fund managers.

So, I’ve finally begun to compose thank-you notes to all the people who provided recommendations for my applications. I’m also writing notes to the people who gave me advice. Better late than never I suppose, and certainly some of those folks are probably wondering how I fared.

In hindsight, it’s truly encouraging to know so many people believed in me. I pretty much had no chance and yet I received a lot of support from various friends and contacts. In the end, the support of all of these people, some of whom had to have been as equally misled as I, is probably the best explanation for why I threw all of this money and effort at something with zero payoff. Well, I guess it’s not zero payoff. I’ve got the warm-fuzzies, knowing my colleagues believe in me, and I think that warrants writing a few thank-you notes.

I do wish, however, that I didn’t have to go through with purchasing personalized stationery. Damn my penchant for formality. I regret that what ought to be a frank expression of gratitude is turning into a miniature exercise in self-promotion.

Anyway, I figured I would share the outline of my letters. I am writing pretty much the same thing to each person, with some lines altered depending on what kind of help I received or whether or not the addressee knows that I got rejected from every school.

Point 1: Thank you for the recommendation/advice/contact at such-and-such school.
Point 2: Nope, I didn’t get admitted/waitlisted/interviewed/taken seriously anywhere.
Point 3: That’s okay though, I learned a lot from/wasted $1600 on the experience.
Point 4: I’m going to reapply/get tonsured and join a monastery.
Point 5: But until then, I’m going to carry on working for you/seeking your advice/sleeping under a tarp in Tompkins Square Park.
Point 6: Thanks/can you get me a better job?

Have you ever noticed that MarketWatch will sometimes reproduce entire articles from subscription media like Barron’s or WSJ?  I think that’s a little weird.

So, I put some representative stocks to which I have significant exposure on my google homepage along with my mutual fund portfolio.  I now waste at least 30 minutes every day just checking on the market.  I question whether or not this is going to create any real insight, though eventually weaning myself off the constant flow of information might be a good exercise in willpower.

Until then I risk making myself unduly anxious every single day.  Ignorance was bliss.

FiNTAG is one of my new must-reads. About half a dozen hedge-fund related bits of commentary every morning. The product of some number of anonymous, British hedgies. Hard to deny the conservative political bent, but, when delivered with enough wit and acidity, I find it palatable enough.

A particular post (scroll down, FiNTAG doesn’t do permalinks!) regarding the growth of erstwhile fund administration bozos GlobeOp received far too little attention. Not so much that GlobeOp has amassed 100 BN USD despite a failed pre-credit crunch IPO and serious lawsuit from former client Archeus. No, but that GlobeOp witnessed net negative outflows on behalf of its clients in January.

This means that some tiny sector of the hedge fund world shrunk. Despite over 200 BN USD in growth last year. The timing is interesting as well, given that some of the worst performance was reported over the summer and then in November and December. Too early and too late respectively to be reflected in January’s activities given a hypothetical 90 day lockup. If I was really intelligent, I would probably double check my assertion regarding common lock up periods. I would also consider tax and other non-performance implications of a January redemption.

Still, the most important thing to take away from this is that it’s possible for the size of the hedge fund industry to shrink. It’s fairly easy to imagine it rolling along, katamari-like, amassing more and more money as institutional asset managers allocate more and more funds to alternatives. We can now see at least some slight evidence that not every investor believes hedge funds to be the ultimate vehicle for generating returns.

I’d like to see if where the money is coming from if it’s going to hedge funds. Are investment pools just growing? or is money being deallocated from certain sectors? And where is it s going if it’s leaving hedge funds? What asset class seems more attractive right now? I highly doubt net negative flows, in this environment, could be chalked up to profit-taking.

Unless you invested with Paulson.

I am still trying to figure out whether or not to reapply next year.  I know my shortcomings this time around probably had a lot to do with my low work experience and relatively thin post-college hobbies.  I’m currently studying for some professional certifications and a foreign language, plus making music again, so on an absolute scale I may look a little more competitive next year.

That said, prevailing wisdom puts 4-5 years work experience as “even”, e.g. the point at which your WE does not negatively impact you.  I think 7 years or more is kind of too much for some schools.  It’s a very delicate process.

Also, I know my essays can be a lot better and now that I’m a little more knowledgeable about the whole process, I can probably say something that admissions people will like.

There are still a lot of unknowns.  I’d like to move to California, but I’m looking at signing a lease on a place in Brooklyn this weekend.  I’d like to explore a different kind of job, but what I do right now is really good for me professionally, and whether or not I like it, the voice in the back of my head is saying “it’s only one more year”.

My course of action would be really obvious if, all of a sudden, I got an amazing job offer out of California.  Oh well.

Show’s over folks.

Apparently I’m still in the running at both schools, though I haven’t gotten an interview invite. Based on admissions411 and this fabulous spreadsheet maintained by the good people on the BW business schools forum, CBS invites seem to be going out about 10 weeks after the candidate’s app goes under review. Decisions follow almost immediately.

My app went under review March 3, so I’m not going to draw any conclusions on anything until May. One thing to note about Columbia is that it’s rolling admissions & early decision, meaning they take a number of early commitments and are fast and loose with the waitlist.

As for UVA, in spite of my trouble with recommendations I am getting full consideration. I think my essays were really strong, so I am hoping I get an interview. According to admissions411, it looks like invites have just started going out. For US students, UVA interviews are done on campus, meaning that they probably do try to get the interviews out sooner rather than later as the candidates have to make travel arrangements.

Fingers crossed, I suppose.

Fund of hedge fund alpha is a measure of a FOF manager’s ability to select hedge funds that outperform a relevant benchmark. This is nuanced. It’s not a measure of the FOF manager’s ability to outperform the market, but rather a hedge fund index constructed post-facto as the hedge funds report their performance. In most cases, the FOF investor does not have the option of buying a hedge fund index, further obfuscating the practical meaning of fund of fund alpha.

It is interesting to note the growth of FOF managers both in number and AUM. Relatively speaking, they’re outpacing regular hedge funds. I know it’s unlikely, but imagine what would happen if fund of fund AUM and hedge fund AUM converged.

There would be virtually no more FOF alpha. Buying a FOF would be like buying a hedge fund index because the FOF manager would have less discretion in how he or she allocates. There’d simply be too much money to deploy strategically.

Hedge fund markets are a little bit different in the fact that most funds will stop taking money after a while. Hedge funds also don’t like big single investors because they are needy and pose a significant liquidity threat. Increased competition for capacity could hurt some funds of funds by forcing them to make smaller allocations to more managers, ultimately acting more like an index than a concentrated portfolio.

ergo less alpha.

This is only a half-baked idea that occurred to me in the shower 30 minutes ago. I’ll see if it develops into anything more.

First, read this post over on financial crookery. You can skip the Wharton paper, it is largely useless.

Hedge Funds are definitely too expensive. I have a few additional comments. (1) In some cases that additional expense is warranted simply because you can’t get what the hedge fund manager is selling anywhere else. (2) A truly fair model for manager pay would outrage investors by forcing them to pay for performance in down markets. (3) If you have a problem with paying those fees, don’t invest! (4) Prices will inevitably head southward due to increasing investor savvy and securitization of previously esoteric investment opportunities.

Details on each idea following the break.

Continue reading ‘Two cents on hedge fund manager pay’

Officially rejected from Stanford.  Not surprised.  I am kind of annoyed that the whole process requires you to log back on to the admissions website.  When you’re out-of-pocket, it’s a little inconvenient to go through the whole rigmarole.

Anyway, with UVA almost definitely a bust, that leaves Columbia.  I’m going to go update my profile on admissions411 to start tracking Columbia.  At this point I know I’m a kind-of weak applicant.  Too little work experience & I didn’t use the optional essays to try and compensate or explain why I was trying to go to b school so early or why my GPA isn’t phenomenal (I was running 3 organizations, spending more time with student groups than I was studying).

Anyway, I figure I need to account for the lack of posts in the last 10 days because I was out of town.  More updates to come I’m sure.  Also more commentary on BSC.