The price of everything

The going gets tougher

“There are times when the burden of taking other people’s money forces you to be active when you don’t really have conviction. It gives you a sense of pressure and expectation. When it’s your own money you don’t have to do anything.”

 

-       Tony James, President of Blackstone, commenting on Stanley Druckenmiller’s decision to wind up his hedge fund. As reported in The Financial Times.

 

 

The Investment Commentary will shortly be taking its summer holiday.

It will return, on Monday 20^th September.

 

As capsule summaries of ‘agency risk’ go, the one above takes some beating. As any honest trader will confirm, being forced to be active without conviction is a licence to lose money. Doubly so in such a convictionless market as the one in which investors are now becalmed. Henny Sender’s article (“The letter that shook hedge funds”) for last Thursday’s FT cites a hedge fund executive similarly bemoaning the apparent lack of alpha male assuredness in alternative asset management:

“Nobody is sending out definitive ‘this is my view’ letters these days. Nobody has any conviction. We go through rallies and we go through sell-offs and nothing is well sustained.”

Well, tough. Above the noise of the world’s smallest violin playing on behalf of the hedge fund community, nobody ever promised them, or anyone else, a rose garden. If the author of the anonymous quote above had been a traditional banker, we could at least have gone onto an extended rant about moral hazard, moral bankruptcy, and the sad triumph of a parasitic underclass that has gone on to devour its host and much of the rest of the economy. As it is, all we can suggest is that in such an apparently challenging market, those who can manage risk should now thrive at the expense of the hordes of overpaid chancers who pollute the ranks of the supposedly homogeneous hedge fund sector. The problem is most acute in the world of so-called global macro funds. In more tightly defined strategies, say credit arbitrage, you make the best – and the worst – from the asset universe available. But in global macro the investible universe is pretty much infinite; there is arguably too much choice, if there can be said to be such a thing. And if a lack of conviction were really warranted, each of those choices today essentially represents an opportunity for the active manager to hang himself.


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Die Hard, with a vengeance

“Money is like manure. You have to spread it around or it smells.”

 

-       J. Paul Getty.

When it comes to dying hard, the cult of equities has few peers. You might have thought that the dotcom bust, the Enron / Worldcom scandals, the recent cascade of banking crises and the current widening stagflation would have beaten equity investors into some kind of sense of submission or at least acceptance by now. Not a bit of it. Notwithstanding the fact that global equity markets, as defined by the MSCI World Equity Index, are currently 22% below their level at the start of 2000, let alone a third below their highs of Q3 2007, the investment media continue breathlessly to report their every move. One can only conclude either that the modern equity investor is a glutton for punishment, or that the modern media producer is a sadist. The average radio or TV business report, if it offers any coverage of markets whatsoever, will tend to focus exclusively on the performance of equity indices. Even interest rates, for example, barely get a look in. Open a typical newspaper, journal or even financial magazine, and see how much coverage – if any – is given to any other asset class than common stocks. For that matter, consider how much focus the fund management industry (retail or institutional) places upon equity vehicles as opposed to any other. While many (funds) may be launched whereas few will ultimately be chosen, it represents a real triumph of marketing over relevance to continue to peddle products that few consumers are likely to need, let alone want. The financial services industry surely attained critical mass by way of long-only equity variety years ago – and the growth of exchange-traded funds has not exactly diminished choice. It is testimony to the lingering attraction of the equity myth that it continues to this day to drive the production of redundant product by an endless array of me-too providers.  Of course not all funds are bad, and not all equity funds are bad; but the signal to noise ratio, given the population of the managed fund universe, has to be low. Most critically, in the context of managed funds, know what you own – which will take some of the sting out of any exposure to managed equities in the context of a potential bear market.

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What’s the colour of money, Part II

 

“Don’t Get Caught Up in Optimism.”

 

-       Headline from CNBC.com which you couldn’t really make up.

 

“Fund managers reconsider their holdings in gold” is a recent headline from TheWealthNet. It cites a report from Standard & Poor’s Fund Services, whom one hopes are more accurate in their assessments of managed fund quality than their colleagues in the credit ratings business. High prices for the metal have apparently if not unsurprisingly led some fund managers to reduce their gold holdings. A team at Barings is mentioned for being disappointed that the gold price has been highly correlated to that of other risk assets, as if investment management were somehow an exercise in the choreography of statistical waltzes rather than an exercise involving the defence and growth of capital. Managers at Union Investment are mentioned for having considered investing in gold but having concluded that “the recent rise of the gold price is not backed by solid fundamentals” (what form of universal currency depreciation would incline them to buy ?). A team at Legal & General apparently believe that gold price appreciation has been driven primarily by low interest rates and ample liquidity, and that “on some technical indicators it looks overbought” (compared to what ? – for more on which, see below).

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Tales of the expected

“A theorem: In matters of military contingency, the expected, precisely because it is expected, is not to be expected. Rationale: What we expect, we plan and provide for; what we plan and provide for, we thereby deter; what we deter does not happen. What does happen is what we did not deter, because we did not plan and provide for it, because we did not expect it.”

 

-       Sir Michael Quinlan, cited in ‘The Secret State: preparing for the worst; 1945-2010’ by Peter Hennessy. Hat-tip to S.G.

 

Another theorem: two years after the failure of Lehman Brothers, literally anything is possible. In financial markets, the boundaries of possibility had previously been circumscribed by a limited number of core beliefs or assumptions: that debt rated ‘investment grade’ was sound; that credit ratings agencies were broadly competent and, as state-sanctioned quasi-monopolies, acted objectively on behalf of the public good; that developed world government debt was essentially riskless; that investment businesses that became insolvent could be wound down in an orderly manner; that regulation of the financial sector existed; that banks operated on a broadly level playing field with the rest of the economy; that financial markets were largely benign structures that operated efficiently; that bankers were motivated by considerations other than greed and self-preservation. In shorter form, that free market capitalism worked.


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