The search for Alpha starts with Beta. Is that the most ridiculous thing you have read this month? I think so, because even though I wrote it and I’m sure I heard it someplace before, I didn’t know what it meant then and don’t know what it means now. I just wanted to be cute, as I have decided to bring the blog back to the topic of finance and markets. My biting, wit-filled political commentary will take a back seat for the time being.
Over the last few weeks a friend, who is without a doubt a critical thinker and understands economics, economic policy and the Federal Reserve as well as anyone I know, and I have been discussing the search for Alpha. While I would never admit this to him personally, I do believe that he and I agree that finding Alpha is extremely difficult. Alpha, you see is the juice one gets by outperforming the market or benchmark. It is the excess return. It is what hedge funds are supposed to deliver and what hedge fund managers get paid for doing.
I have a problem with this. The problem is that I don’t believe that there are so many people who can find Alpha. It is impossible to think that there are so many smart people managing money who can find opportunities that others miss and exploit these for a profit. Am I wrong? I don’t think so. I don’t think these people are fraudulent in their assertions; I believe that they think they can find Alpha and try very hard to do so. The problem is that numbers don’t lie and seem to prove my point.
As many of you know, I have little if any regard for the hedge fund databases, not because they are bad (this will remain my opinion, by the way, until we have standardized reporting) but because I question the quality of the data. Still, most of the databases and indices that track hedge funds showed them down between 25 and 35 percent last year. This alone, good data or bad, I believe proves my point: Everyone is executing the same trade.
The herd finds an idea, runs with it, the first person out makes all the money and the rest get slaughtered. It seems that many so-called hedge fund managers have started to act like their mutual fund brethren – they are managing for mediocrity. They end up here because they want to attract sticky assets – pension plan and endowment assets. The closer they are to the mean, the more likely they are to get this money. I believe that this is the wrong way to go. I believe it is a mistake and I believe it is trend that needs to be broken.
The only way investors are going to recover from the last two years is to look for managers who don’t operate with the intention of hitting the mean. They need to find managers who take risks (calculated risks, that is) that are going to pay off, not only in the near future but in the distant one as well. Managing for mediocrity is not something worth paying for – stay away from these manages. Trust me, it will be worth it.
THINGS THAT DRIVE ME CRAZY
Nothing to report this week. Stay tuned however, this is not going to last.
Wednesday, April 29, 2009
Tuesday, April 21, 2009
A Good, Honest, Decent American Is Hard To Find
Why is it so hard for the Obama administration to find good, honest, decent Americans to work for it? It seems every day we are learning that this person that President wants for his cabinet or that person he wants to work in Treasury has had some problem with something.
I don’t understand. Could Daniel Schorr, in his NPR’s All Things Considered piece of March 4, “Vetting Process Out of Control,” be right when he writes “that the issue should not be past mistakes, but transparency about them,” when commenting on why it’s OK that the Senate confirmed Timothy Geithner despite his tax indiscretions simply because he came clean about them? C’mon, this can’t be right. Simply telling someone you did something wrong doesn’t absolve you from the misdeed. It just means you told someone about it.
Then we learned that the man deemed fit to save the United States automobile industry is “an emerging figure,” according to The New York Times, in the corruption investigation of the New York State pension program. And while Steven Rattner, President Obama’s point man for the auto industry, has not been accused of any crime, according to the same article, he arranged to have his firm pay one of the indicted people being investigated a fee for getting business from the pension plan.
It just doesn’t add up to me. I am confused as to why the President and his advisors just can’t seem to find people to work in Washington who don’t have to come clean or, more pompously, "be transparent” about past indiscretions. I don’t agree with Mr. Schorr’s comments that the vetting process is too difficult. I believe it is too lax. The bar for these people – our leaders – needs to be raised to new heights.
One of the biggest complaints about the Bush administration was Vice President Cheney’s past work at Halliburton and other links to government contractors. While I don’t know all the facts, where there’s smoke there’s probably fire and frankly it seems that we all have been hurt by this relationship. If this type of situation was not acceptable then, it should not be acceptable now. President Obama has to say “Enough is enough” and bring in people that are beyond reproach, as he promised. Only then will he get the respect, admiration and the ability to look us in the eye and say that he’s really brought “Change” to Washington.
THINGS THAT DRIVE ME CRAZY!
Right now nothing is bothering me, except that the Red Sox have gotten off to such a bad start. I expect things to turn around soon. If they don’t rest, assured you will read about it in this blog.
I don’t understand. Could Daniel Schorr, in his NPR’s All Things Considered piece of March 4, “Vetting Process Out of Control,” be right when he writes “that the issue should not be past mistakes, but transparency about them,” when commenting on why it’s OK that the Senate confirmed Timothy Geithner despite his tax indiscretions simply because he came clean about them? C’mon, this can’t be right. Simply telling someone you did something wrong doesn’t absolve you from the misdeed. It just means you told someone about it.
Then we learned that the man deemed fit to save the United States automobile industry is “an emerging figure,” according to The New York Times, in the corruption investigation of the New York State pension program. And while Steven Rattner, President Obama’s point man for the auto industry, has not been accused of any crime, according to the same article, he arranged to have his firm pay one of the indicted people being investigated a fee for getting business from the pension plan.
It just doesn’t add up to me. I am confused as to why the President and his advisors just can’t seem to find people to work in Washington who don’t have to come clean or, more pompously, "be transparent” about past indiscretions. I don’t agree with Mr. Schorr’s comments that the vetting process is too difficult. I believe it is too lax. The bar for these people – our leaders – needs to be raised to new heights.
One of the biggest complaints about the Bush administration was Vice President Cheney’s past work at Halliburton and other links to government contractors. While I don’t know all the facts, where there’s smoke there’s probably fire and frankly it seems that we all have been hurt by this relationship. If this type of situation was not acceptable then, it should not be acceptable now. President Obama has to say “Enough is enough” and bring in people that are beyond reproach, as he promised. Only then will he get the respect, admiration and the ability to look us in the eye and say that he’s really brought “Change” to Washington.
THINGS THAT DRIVE ME CRAZY!
Right now nothing is bothering me, except that the Red Sox have gotten off to such a bad start. I expect things to turn around soon. If they don’t rest, assured you will read about it in this blog.
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