Unrealistic Expectations or User Error?
One sure bet is to bet against the media, another famous magazine cover was also from Business Week, only it was 34 years ago. The title was "The Death of Equities" which came out shortly before the largest bull market in history.
August 13, 1979
Magazine Cover IndicatorI only wonder where hedge fund performance would be were it not for the Fed and other central banks pumping liquidity into the market?
It ain't over until "the fat lady sings". Takeaway...hedge funds are not a replacement for being long equities or fixed income, structured properly, they are their own asset class, and inserted into a portfolio correctly, they "should add truly non-correlated alpha. A properly constructed portfolio should have long equities both domestic and international, emerging markets, non-aggressive and aggressive fixed income, commodities, managed futures, FX, and yes, hedge funds in various flavors. I would also add real estate and timber. If running a portfolio like that today, one would be re-balancing out of the superior performing equities and into those asset classes that have not done as well. Today that would be managed futures and hedge funds.
The importance is picking those who stick to their expertise, hedge funds are run by people, and people have clients that read the media and put pressure on their hedge fund managers when they underperform, also since hedge funds make their money only when they make money for their clients, I suspect that many long / short funds have been lifting their short positions to participate in this non-fundamental liquidity driven market. In the end, many of these funds are really not unlike the average investor, they chase return.
Financial markets are a powerful example of Darwinism, it will pressure every strategy, approach, and asset class at some point in time to excruciating pain. This is good, it weeds out weak, sick, and old. More often, it eliminates the return chasers. If you know this going into the investment business, that there will be times that your style will be under such pressure that you want to change your stripes, you will have a better chance of making it through. Only the weak cave in. However, this assumes that the underlying thesis of your approach is sound. If it's based on time tested factors like valuation and mean regression.
If the mandate is institutional, managing a portion of an overall portfolio then communication is consultative ...what are the theoretical and academic underpinnings, when a strategy works, how it works, when it doesn't, how it correlates with other portfolio components, etc.
If one managing the entirety of a clients portfolio, like wealth management then be holistic, be diversified AND re-balance, even when it seems crazy to lighten up on a out-performing asset class and reallocate into an underperforming one.
Today that would be managed futures and hedge funds. Note, these adjustments are on the margin, no market timing here, just "buying straw hats in the winter".
Blake Singer - Portland 5/26/14Lastly, it's at the tails of return distributions that the greatest mistakes are made. If you can manage the tail risk through proper asset allocation, and not cave into chasing return, which your clients and the media will pressure you to do in under-performing times, with a little luck, you might loose the sprint but win the marathon.