Saturday, September 25, 2010
Half empty, Half full...the sell/buy side perspectives
Incentives drive perspectives and perspective is everything. I visited a fund manager with an associate recently and after 2 hours of sitting through the usual sales pitch, we wrapped up and debriefed outside the meeting.
The quick and dirty assessment was that he was "really smart because he had an MD/PhD and was very articulate". I take a different view, while you must possess a requisite level of intelligence to be a successful investor, there has been no proven correlation between super-intelligence and successful long-term investing. This was the first point of divergence.
However, the major point of contention came when we discussed the manager's background. His previous fund had "blown up", a common occurrence in the hedge fund world whereby a fund manager performs badly, receives redemption notices from investors and is then forced to liquidate positions, usually at a discount to what they are worth to generate liquidity. This is a downward and vicious spiral that usually results in the fund winding up and the manager going on "sabbatical" for 6 months before the next incarnation of his fund.
My counterpart's assessment was that it was a good sign because he "had been to hell and back". I take the 180 degree opposite view, to me, he is a poor manager of risk. A manager must factor in periods of extreme stress and avoid blow-ups, regardless of
market conditions. That's what fund managers get paid exhorbitant fees for.
We worked the same job but it appeared that we were both operating in bizarro parallel universes. I was stunned by how different our views were.
Later that day, I realized that it was simply a matter of incentives. He came from a fund a funds that was sales driven. I viewed the world as a fiduciary responsible for the welfare of my family. Heaven and earth stood between us and it became clear.
The quick and dirty assessment was that he was "really smart because he had an MD/PhD and was very articulate". I take a different view, while you must possess a requisite level of intelligence to be a successful investor, there has been no proven correlation between super-intelligence and successful long-term investing. This was the first point of divergence.
However, the major point of contention came when we discussed the manager's background. His previous fund had "blown up", a common occurrence in the hedge fund world whereby a fund manager performs badly, receives redemption notices from investors and is then forced to liquidate positions, usually at a discount to what they are worth to generate liquidity. This is a downward and vicious spiral that usually results in the fund winding up and the manager going on "sabbatical" for 6 months before the next incarnation of his fund.
My counterpart's assessment was that it was a good sign because he "had been to hell and back". I take the 180 degree opposite view, to me, he is a poor manager of risk. A manager must factor in periods of extreme stress and avoid blow-ups, regardless of
market conditions. That's what fund managers get paid exhorbitant fees for.
We worked the same job but it appeared that we were both operating in bizarro parallel universes. I was stunned by how different our views were.
Later that day, I realized that it was simply a matter of incentives. He came from a fund a funds that was sales driven. I viewed the world as a fiduciary responsible for the welfare of my family. Heaven and earth stood between us and it became clear.
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