Seeing as I’m logged on…
One of the reasons that I have been updating less frequently is that I’ve felt an increasing need to keep my ideas private. I’m developing a bit of a business plan and while I appreciate the feedback that I’ve received from colleagues and mentors, I don’t think I’m ready to expose my plan to the 2 or 3 people who visit this page each day.
In other news, I’ve had the opportunity to go on a fabulous amount of travel recently. My job is finally living up to the “global travel” mentioned in the posting I responded to on Monster.com over 3 years ago. Sometimes, consulting is alright.
Apropos of places I can’t tell you I’ve been and clients I can’t tell you I’ve met, sovereign wealth funds are very interesting. After dealing with commercial or otherwise regulated money managers for so long, it’s quite an epiphany to realize that a SWF answers to no regulatory body and has no duty of care to any client, even its own government. They are measured on one thing and one thing own: profit. Further, no matter how successful the investment team, the whole operation can be liquidated if the government faces a shortfall.
I might think working at a SWF is pretty risky, but I honestly don’t have enough experience to confirm or refute this idea.
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Tags: SWF
Personal Update
I passed the exam, paid my fee, and now I can insert a jumble of letters after my name. For whatever reason, I felt a lot more confident about the level 2 exam. Though I was never 100% sure that I was going to pass, I was actually less excited when I got my level 2 results relative to level 1.
People still look at me and think “software guy”. It’s frustrating. I recently worked with a client who, similarly, had responsibility for business applications and IT decisions, and had completed CAIA certification around the time of its inception. He actually appeared to be dead set on leaving the industry completely. I guess I’m saying that in the end, it isn’t an indicator of much.
Still thinking about business school. I had an opportunity to visit Kellogg and Chicago Booth the other month. Booth was awful. Really. The students were snobby. The fancy new b-school building was really not that impressive on the inside. The few administrators I met proudly proclaimed that the school was changing nothing in the wake of the recession. That was disturbing. From an admissions standpoint, they talked a lot about how “fit” was important. I left feeling like that school was a very bad fit for me.
My experience at Kellogg couldn’t have been more different. The students were friendly and humble. I didn’t deal with hardly any admissions people. Everyone seemed pretty engaged in what was happening to the economy. Most important, however, was the other potential students. When I go to info sessions, the thing that turns me off the most about business schools is the other prospective students. They reek of hollow ambition. They stink of outsize expectations.
The prospective students that I met at Kellogg, though, felt like people with whom I would actually want to be friends. It could have been coincidence, but it has definitely been the most striking thing about any school that I have visited.
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Tags: business school, CAIA, Chicago Booth, kellogg
Transparency: What Counts
Just a quick thought. What enabled frauds like Madoff, Petters, Dreier, and Israel was not the opacity of their strategies or processes, it was the opacity of their operations. For all I care, a manager can use astrology to make his investment decisions. So long as there are material accounting, legal, and brokerage operations in place, at least I know the guy is actually making trades.
Making a representation of position-level transparency does not yield any insight into the quality of the manager’s operations. The obsession with knowing exactly what the fund manager is doing runs counter to the entire idea of outsourcing your wealth management decisions, a.k.a. investing. You don’t need to understand what the fund is doing so long as the fund adheres to its mandate.
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Tags: hedge funds, madoff
Oh, also, I *have* to link to this graphic illustrating Fairfield Greenwich Group’s due diligence process.
Goodbye, FFG.
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Quick Update
Where have I been? Things have been really, really busy. Not posting is kind of a self-sustaining loop. The less often I look at my own blog, the less inclined I am to post.
So here’s where I am: got my study materials for CAIA level 2 a few weeks ago. I’m somewhat behind schedule—didn’t manage to make up as much time over xmas as I thought I would. Still, finding level 2 a bit more enjoyable than level 1.
I’ve expanded my horizons slightly as regards school. While I’d previously dismissed UC and Kellogg because of the weather in Chicago, I met an alum who managed to put me at ease with the prospect of freezing my ass off. I’m also going to visit Yale at some point, pretty much just because I can. I was intrigued by their hedge fund class, though the fact that it is run from the perspective of a fund manager and not an investor means it’s not really my thing. And for what it’s worth, I’m going to go ahead and check out info sessions at Columbia and NYU again. I hope that, by this point, any info sessions will touch on applying in the coming fall.
Last but not least, there’s Madoff. It’s still too early to distill any serious implications out of the Madoff fraud. So far, the media’s focus appears to be on the damage and not the inevitable regulatory response. One of the most interesting things I’ve found is the wildly divergent fees various people charged just for access to Madoff—access that came without the added benefit of oversight or diversification. Check out this article at the WSJ to see how different middlemen charged ridiculously inconsistent fees for access to Madoff. It’s just more evidence of how seriously broken the whole “pay for access” model is. Doesn’t even matter that Madoff comitted fraud, the fact that one guy can charge me 3 times as much as another for the same investment is ridiculous and inefficient. I’ve been kicking around a number of ideas about how to improve this model and, more to the point, the whole fund of fund concept. I hope to post on that soon.
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Tags: business school, CAIA, hedge funds, madoff
Sellout?
I think this article at naked capitalism touches on an interesting point: could forced selloffs by hedge funds really explain recent dips in the market?
I do not believe we have seen the full effect of hedge fund redemptions yet. We don’t know everything about every fund’s redemption terms, but Dec 31 is a fairly common redemption date regardless of the fund’s liquidity. Most redemption notices were probably due 9/30 or will be due 11/15. So, at this point we can only guess as to the extent of redemptions that have been requested. Also important to keep in mind: most funds promise return of investor capital within a certain number of days after the redemption date, not on the redemption date itself. In all likelihood, much of the money requested for 12/31 won’t have to be paid out until 45 to 90 days after that date.
What I’m saying is, it’s possible that we haven’t begun to see the full extent of forced selling. If forced selling by hedge funds is really going to have a significant impact on the market, we’ll see it most in early 2009 as managers scramble to come up with cash at the last minute. Right now, it’s still plausible to suggest that managers are simply trying to accumulate cash in anticipation of redemptions and do not yet have their backs up against the wall.
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Tags: hedge funds
It’s not so bad in the middle
First, congrats to all who passed their exams & better luck next time to those who’ll have to try again. My overall feeling about CAIA level I is that it was surprisingly light on the quantitative stuff. I studied performance and risk measures so hard and BAM there are like 20 questions on convertible bonds. What the hell. Anyway, in all likelihood I’m taking level II in March and I hope it’s not tacky to admit that I passed.
So, here’s an idea I’ve been kicking around: is it really so bad to be a midsize hedge fund? Conventional wisdom (also: several McKinsey, E&Y, and PWC surveys) says that size is one of the most important indicators of fund success. As I’ve mentioned before, a lot of assets is important for soothing institutional investors who worry that the fund might blink out of existence after a few trades go bad. So, high AUM is part of a self-sustaining cycle where size alone makes it easier to grow your assets ever larger. Also, your return expectations in fact DECLINE seeing as your investors are primarily institutions.
Which is to say, Joe Pension Fund just wants 8-10% returns net of fees with low volatility. Small funds have to promise so much more.
Anyway, I’m wondering if the conventional wisdom is maybe a little wrong. Maybe there are advantages to being midsized, especially in difficult markets. What advantages could a midsize fund possibly have?
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Tags: CAIA, hedge funds
Eww
I just realized I dreamt last night about failing the CAIA exam. Eww. Results for level one are out on Tuesday I think.
In other news, a number of sources latched onto HFR’s report that September was the Worst Month for Hedge Funds Ever. Check out some of the better stories on Friday’s Abnormal Returns.
Had a good chat last night about the market’s response or lack thereof to the bailout. I was glad to see a small dip because it means investors are still in the business of assessing the long term prospects of companies instead of just gaming the system. Monday’s fall and Tuesday’s recovery, to me, made it apparent how market movements are driven by speculation. The long term effects of the bailout are nearly impossible to guess. If anything, it has been interesting to learn that many companies are very much affected by the overall health of the credit/mortgage industry.
I’m semi-serious. I’d like somebody to explain to me why coca-cola’s prospects are any dimmer because Wall Street is dying and nobody can pay off their mortgages. I don’t necessarily choose between paying my rent and buying a soda, yknow? I have completely different economic thought processes for discretionary spening on consumable goods vs. larger expenditures.
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Tags: CAIA, hedge funds
CAIA Anxiety
One post about the CAIA exam has led to an enormous (relatively speaking. this blog gets usually about 2 hits a day. now it gets 20) spike in the traffic on this blog. In a shameless attempt to generate more traffic, here’s a nother CAIA post.
I’ve spent most nights and the last couple weekends locked away in my apartment studying. That said, it really hasn’t been so bad. The Schweser question bank is enormously helpful and I’m geting 70% give or take on the practice exams. Should be enough to pass & it’s just one more week of studying (and the stunted social life + poor diet that comes with it) until the exam.
You have to make some tradeoffs in studying I think. Like Real Estate, Private Equity, and Credit Derivatives–I know that there will be one or two questions each on DCF, IRR, and CDO structures. I will never, ever use any of that stuff in real life. I don’t think it’s worth it to memorize the keystrokes on my calculator. I’d rather focus on concepts that I already sort-of know but am more likely to use practically.
Of course this also bodes ill for the level 2 exam which involves even more esoteric math. A central problem with all of this is that I don’t actually do any of the quantitative stuff at my job. In what I do, there’s a big focus on the the nature of funds, due diligence, and other “fundamentals”, but no math. On my practice exams I’m getting perfect scores on those sections but maybe only 50% on quantitative methods.
Hell, I got a C in statistics in college. I hate math.
So here’s hoping the distribution of questions leans towards concepts and not applications. Good luck to everyone else if you haven’t taken the exam yet.
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Tags: CAIA
AllAboutAlpha has an interesting take on a recently published study regarding the relationship between tenure, size, and returns in fund of funds. Briefly, young, small funds tend to outperform their larger peers, but as they age, small funds underperform funds with more AUM. AllAboutAlpha also points out the really interesting dispersion of size and performance statistics, with some managers reporting under a million dollars while others claim over $8 billion in AUM. There is significant skew towards the larger funds and really fat tails, indicating more or less that fund AUM is anything but normally distributed.
This makes a lot of sense when you consider the average fund of fund investor. A Fund of Fund is not a vehicle for obtaining excess returns. The idea is to gain the risk protection of hedge funds as an asset class while avoiding the idiosyncratic risk that causes occasional fund death (Ospraie, Atticus, Ore Hill, and others are today’s headline failures). What I’m saying is, outperformance doesn’t matter as much as exposure to a large number (some say 20, others recommend as many as 40) of hedge funds, especially good hedge funds that are hard to get into if you don’t have a lot of money or the right connections.
Joe Pension Fund doesn’t have the money or the connections, but he can pool his resources with a number of other investors and take advantage of the fund of fund’s economy of scale and dedicated research department in order to gain exposure to hedge funds that otherwise would have been out of his reach. When this is your goal, size matters.
In order to compensate for lack of access (and consequently, less risk budgeting), smaller fund of funds need to have better performance.
But why doesn’t the investor just go for higher performance, isn’t that the only thing that matters?
Think about why a fund of fund might be large even at its inception. Talented, well-connected management, a team and business plan capable of attracting a lot of capital, and guaranteed access to some desirable funds. Size alone is one of the most important indicators of fund stability. Right now a few large, well known funds are struggling. What you don’t read about is the fact that tiny funds die all the damn time.
So for the beleaguered pension fund manager, if you care primarily about exposure to hedge funds in a sort of portable alpha/downside protection way (and you should), a fund that promises stability through its size requires less due diligence and is ultimately a preferable long-term investment. A large fund, though it underperforms, can still be attractive.
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Tags: hedge funds
