PC, VC, Hedge Fund, Commodity/Real Estate

April 11, 2019

By Elana Margulies-Snyderman 

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.   

This week, Elana talks to Andrew White, CFA, CEO and Chief Investment Officer of Awaken Capital LLC/ Awaken Uncommon LP (start-up of 6 notable investors).

What is your outlook for alternatives?

  1. Private Equity (PE) – THE way to play alternatives. The business model is solid (i.e. find poorly-managed/great branded companies, buyout low, restructure operationally and financially, IPO high in a few years) and has lower risk than either of the three alternatives below. Indeed, PE has generated 20% more return with much lower risk vs. venture capital (VC).  It is also notable that returns have proven basically stable over the last 20+ years (i.e., no decline in general in generated returns).  Indeed, you could even invest in PE at 1.5:1 leverage, keep risk low, and make literally 4x the return of VC funds with a 2x Sharpe Ratio (not that it matters so much/Sortino ratio is the REAL risk/reward ratio the industry should watch)!  Funds of PE funds are the way to play PE.
  2. Venture Capital (VC) – Not bad, but not great. PE’s sexier cousin; VC gets the glitz of potentially finding “The Next Google,” but reality is another thing.  Sure it’s interesting, even exciting; but most new ventures fail (i.e., decent returns matched by similar risk).  VCs annual returns have also been declining ever so much over the last 20+ years.  That said, VC is still slightly better than hedge funds, by far.  Funds of VC funds are the way to play in VC.
  3. Hedge Funds – Beware. 0% net compound annual growth rate (CAGR) for 11 years, huge volatility (e.g., 2008/09, 4Q19 hiccup), correlation, little transparency, no evidence of sell discipline, expensive – e.g., about $60bn+ just for showing up.  An entire generation of hedge fund managers have been raised in longest U.S. bull market in history.  Not only couldn’t they perform in such positive circumstances, but they failed miserably in market volatility.  The next 2+ years will likely be choppier; trends are already set. 

The industry is funded likely due more to psychology than wisdom now.  Therefore, rare funds are the way to go when investing in hedge funds.  Much to my surprise, those few funds tend not to use a single strategy alone; they are multi-strategy.  By bringing together great investors – each with their unique high return/low risk, zero correlation strategy – a multi-strategy fund can hone even higher returns and lower risk still with zero correlation together than previously a stand-alone one.  The only U.S., non-sector exceptions to this rule are credit arbitrage and fixed-income asset-backed strategies, since they offer intelligent diversification.

  1. Commodities/Real Estate/Other – No comment, other than to watch the economy, which will likely remain better than expected in the coming decade (with bumps). I would stay away from interest-sensitive investment vehicles, though.  Also, avoid anything with “bit” or “block” in its name as it has been/will possibly again be the largest bubble the world has ever seen (i.e., makes tulip-mania look like nothing at 100x the speed).  Exceptionally-volatile, shot-in-the-dark investing is not my thing.  If you own your home, you have enough real estate in your total portfolio.

What is your outlook for the economy?

Irrelevant, except in tactical asset allocation.  Back in the day, I was a deep-thinker, fundamental global analyst/strategist for six years at major banks in London.  Put another way, I was educated, trained, and evolved to become a subjective investor who knew all about economic/market lifecycle investing.  For the last 15 years though, I no longer invested subjectively.  I became an objective quant (but not as you know them) investor who lets the market tell HIM what to do.  The market could care less what I think.  As a chief investment strategist, though, subjectivity informs strategy allocations.

Therefore, the U.S. economy (the one I and Americans naturally care about most of the time) will likely remain better than expected in the coming decade, with interim “bumps.”  4Q18 is a prime example.  Why?  Simple: current/future tax cuts, deregulation, revised trade deals, and politics (e.g. 75% of 4Q18 S&P500 pain occurred post-Midterms in just 50% of total duration – now producing a 2-year ugly head and shoulders pattern).  The nation’s on- and off-book liabilities ($120+ trillion vs. $20 trillion 2018 U.S. economy) are also a sleeping giant.  If interest rates return to average levels, I would almost be an equity perma-bull and fixed income perma-bear.  That and a market neutral hedge fund manager (but not at all as you know them either)…which happily I am. 

The only substantive issue to potentially upset the investment apple cart is China reprising the role of 1990 Japan around 2020.  Someone really should create a U.S./Global short ETF on the largest “investments” China has globally made for decades.  They will likely soon enough become fire sales to help shore-up the true horror of China’s then shrinking economy.  Ironically, China’s pain could well be America’s gain: acceleration of entrepreneurs out of China, global investor “flight to U.S. safety,” the trade deficit would virtually disappear almost overnight, and U.S. demand would shift homeward and to other more stable Asian countries.  The only real negative is China dumping $1 trillion+ in T-bonds. 

What keeps you up at night?

Only my wife.  Seriously.  If you know how to invest intelligently, then what is there to truly worry about outside of occasional daytime trading to adhere to strategy/risk control?  Many years ago, a friend pulled me aside and said, “There are two types of investors in the world.  Those who want to make money and those who want to look good.”  We all know that most of the asset management industry (however defined) has chosen the latter option, and it shows in short-term and long-term performance.

We collectively and individually must unlearn what we have learned; TO THINK AGAIN TO SET OURSELVES FREE!  And hiring fresh, data-mining, programmer PhDs doesn’t count.  For all the flash, those “quants” made little-to-no-impact on industry returns over a decade.  These quants now control $1 trillion assets (i.e. 1/3 of the hedge fund industry) which are likely leveraged more than average – long and short basically everything – with few manning the automated trading wheel.

To put it in perspective, in the 20 years following long term capital management’s (LTCM’s) almost-market-disaster, today’s quant strategies of the world perpetually recreated over the same 20 years (of which I am one though done much differently) are now on automatic, inevitably correlated and running even when their managers are asleep.  Unbelievably, today’s quant funds represent 1,200% the relative risk of LTCM.  Only this time around, they are scattered globally.  The Feds of the world will not be able to effectively intervene once carnage commences. 

Imagine the global rush to cash through a future-infinitesimal door with potential blow-ups and downs coming from who knows what asset next, every day.  Now, if that doesn’t keep you up at night, nothing will. 

About Elana Margulies-Snyderman

Elana Margulies-Snyderman is an investment industry reporter and writer who develops articles, opinion pieces and original research designed to help illuminate the most challenging issues confronting fund managers and executives.

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