Random musings that sound like venting

Mod Note (Andy) - We're reposting the top discussions from 2015, this one ranks #8 and was originally posted 8/23/2015.

There's really no point to this post.

TLDR: Sometimes it's just a job with a boss that does boss things.

1) Young PMs in a bull market

30-something year old HF PM/Partner scare me...and should scare LPs. You know the type. Started career around the financial crisis and survived the purge since it was generally cheaper to keep competent junior staff around. Rode the subsequent liquidity wave to financial/career success - more often than not - acting as the bull to the gray hairs who were paranoid about downside risk and reluctant to invest in names. Almost has an investment banker vibe to them but they're really fun to go out with on the sell-side conference circuit. There are a lot of successful young investors in the market but I worry when the tide goes out there's going to be a lot of inexperienced captains causing shipwrecks.

2) Disappearing contrarian oddballs

Speaking of bankers, it's amazing to see how much the industry has institutionalized over the last few years. The kids that are coming in these days are much more polished and highly opinionated about how they look at the world and what they want to accomplish. Nothing wrong with that but the days of finding that eccentric/oddball investing contrarian is dying. That saddens me a bit. I was once asked what's the type of candidate I was looking for and I said I was looking for world class capital allocators who couldn't get an IB/consulting job to save their life.

3) This is not a Whitney Tilson reference

Some hedge funds are glorified fund of funds. The portfolio essentially reflects the "best ideas" (and I use that loosely) of their HF buddies. The fund (cough..of funds) has a "checklist" to make sure the name fits within the fund's philosophy/mandate but the conviction is tied to the rolodex and not the due diligence.

Getting ideas from smart investors is not a bad thing but few things annoy an analyst more than having a PM say "Hey I just talked to [HF buddy] and they said we should check out [that company that you've already looked at and is not a great idea and/or an uncomfortably crowded trade]". Heaven forbid that hedge fund hotel name blows up...it's the analyst's fault for not digging in deeper.

4) Monkeys throwing darts

The risk management controls at some of these multi-manager funds are getting so good it will not be long until they start hiring monkeys to throw darts and make money. Some would say they're already doing that..I kid...although I'm not surprised some PMs feel like monkeys with the restrictions put on them. But then again, many are happy to be a monkey - or a clown - for the money.

5) Clown high school

Stay in the business long enough and you'll hear [Investor/Fund] is a clown that doesn't do any real work for about 90% of the folks in the business. The other 10% are your friends and you wouldn't overtly call them clowns but...never mind. It's a small world and things do get a bit high school cliquey at times.

6) Buying the valuation patterns. TA for fundamental investors

For as much (legitimate) flack technical analysis gets, it's remarkable how many fundamental investors have their own mindless pattern recognition biases (usually in the form of a valuation framework) that can lead to awful outcomes. This is especially an issue when the amount of capital that needs to be deployed materially exceeds an investor's investment sweet spot (which could be honestly 60%+ of the AUM). That need to quickly deploy capital leads to short-cuts and heavy reliance of patterns and frameworks that can lead to poor results

7) The principal–agent problem is real [but not at my fund]

Many come into the business with an idealistic view of how investing should be done...usually it's some variation of Buffett/Klarmen value investing with thorough due diligence. Needless to say many are initially shocked/disappointed when they look behind the HF curtain and see how a lot of investment decisions are actually made...although that disappointment wears off a bit when the bonus rolls in.

That's not to say HF and LPs are recklessly misaligned. Just a friendly reminder hedge funds are investment products with principal-agent issues no different than what shareholders deal with. There's pressure to put money to work and retain AUM.

8) The pendulum swings between boredom and burnout

Life as an analyst can swing between boredom and burnout. This probably isn't a significant issue until you start reaching "the middle" of your career and begin to seriously question what's the point of it all (besides the money). To be fair, there are plenty of analysts that don't feel anything because they're Ivan Drago and everyone is in awe of their beastly productivity.

Comments (22)

 
Aug 16, 2015 - 9:44pm

Though young (late 20's) I think points 1 and 2 are accurate. You don't find many young'uns reading the likes of Kindleberger or Grant's, let alone even know about such books, newsletters, etc. Rob Rodriguez at FPA seems to always paraphrase Charlie Munger who said to read history if you want to get better at the investing game.

As for point 2, if I could find a way to do investing as Walter Schloss did (i.e. net-nets on a stable capital base...from what was essentially a closet), that's what I'd be doing - compounding 15% a year for 45 years isn't a bad proposition! I really like ugly ducklings and generally have a handful at a time for the middle drawer.

 
Aug 17, 2015 - 10:32am

3 is so true. Especially when half the time it's a name you brought up in passing like 3 months ago when you said "Company XYZ could be worth looking at but we probably have better ideas to work on right now", and the PM's like "yeah, don't waste your time on that one". Then one of his buddies mentions it and suddenly it's a slam dunk. If it works out but you didn't get in, the analyst missed it; if you get in and it implodes, the analyst missed it. And you won't get any credit if you made the right call. Completely thankless task.

1 scares me a lot. There are so many guys in the industry right now who have only ever been in risk-taking roles during a bull market (myself very much included). Should be good viewing when the pendulum swings.

 
Aug 17, 2015 - 4:22pm

A post so good it brought me back from the dead. Particularly enjoyed #s 1-3. Funny we have basically the exact opposite problem to number 2 here in Silicon Valley, so many people that think they're the oddball contrarian that the "contrarian" position often becomes the dominant meme in the echo chamber.

Thanks for sharing. +1.

“Millionaires don't use astrology, billionaires do”
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Best Response
Aug 17, 2015 - 6:17pm

Sorry, #1 sounds logical and all, but I doubt the correlation between age and "blowing-up" is very high. In 2008, plenty of guys in their 30s made a killing (usually more of a macro bend). If you graduated college in 1995 you were 35 years old in 2008 and had already seen a lot of stuff (asian crisis, ltcm, tech bubble). Plenty of "experienced" managers had horrible performance in 2008 (and generally if they stayed bullish they made it back and then some). The big "secret" is most hedge funds are massively long and will get crushed in a big market sell off. Plus, as you say in #3, they are all in the same names anyway. The better ones just realize not to panic and stay invested at the bottom - perhaps that is the better argument for youth vs. experience BC losses will probably be the same.

 
Aug 20, 2015 - 2:39pm

HedgeHog:

Sorry, #1 sounds logical and all, but I doubt the correlation between age and "blowing-up" is very high. In 2008, plenty of guys in their 30s made a killing (usually more of a macro bend). If you graduated college in 1995 you were 35 years old in 2008 and had already seen a lot of stuff (asian crisis, ltcm, tech bubble). Plenty of "experienced" managers had horrible performance in 2008 (and generally if they stayed bullish they made it back and then some). The big "secret" is most hedge funds are massively long and will get crushed in a big market sell off. Plus, as you say in #3, they are all in the same names anyway. The better ones just realize not to panic and stay invested at the bottom - perhaps that is the better argument for youth vs. experience BC losses will probably be the same.

It's an interesting debate to have. I probably could have said "PMs who allocate large sums of capital with little-to-no experience dealing with market inflections scare me" but "young PM" captures my own observations which is biased and should be taken with a grain of salt. (Frankly everything I say should be taken with a grain of salt)

My views on #1 is tied to the current generation of young PM I've had the pleasure of interacting with (both good and bad) and is not representative of past generations. It's difficult to compare generations given the impact market cycles have on influencing investment preferences/biases and fund dynamics.

In the 2000s it was not unheard of to spend 1/3 of your time (or more) looking at banks (as a "fundamental" investment and not some macro play) and to worship Jeff Gendell as a hedge fund god. Today a generalist would potentially get thrown out pitching a bank and most have reallocated that time to tech/consumer/healthcare instead of financials.

We could probably debate for hours on what drives the emergence of young HF stars and how equipped they are to handle a market cycle. From what I've seen, young investors rise to PM prominence due to 1) org structure dynamics (seeded spin offs, no partners above you, multi-manager model, etc.), 2) being overweight "risk on" in bull markets (don't run into many young stars who rose to prominence due to their 'risk off' skills unless it's a specific fund strategy/mandate), or 3) benefitting from the emergence of a hot (new) industry or category they are the resident expert/pioneer (i.e. private markets, activism, etc.)

Point being most aren't quickly promoted for their ability to manage through cycles which can make things a bit interesting in a down market and why you see multi-managers implementing stringent risk-management controls on all their PMs post financial crisis (regardless of age).

 
Aug 17, 2015 - 7:08pm

Well done; you've managed to offend everyone except a lone over-40 Burry-esque contrarian small-cap value guy closed to new investors out there somewhere. Headline #3 made me laugh though.

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Aug 18, 2015 - 7:41am

5 is my favorite. Everyone has their circle and a few frenemies and everyone else is an idiot unless they have the same position on.

There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.
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Aug 18, 2015 - 2:59pm

Warms my heart to know other people in the world get the Whitney Tilson joke

Array

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Aug 23, 2015 - 10:02pm

I think the sentiment of #1 can apply to virtually anyone who is actively investing today. Even the oldest investors around, including Buffett, have lived through a period of incredible success for the U.S. economy and markets. And at every point in their investing careers, the correct response has been to be all-in long for the long term. Every dip has had a fairly quick recovery. There is not clear reason to believe this pattern will repeat for the next 50 years, but the "lessons" of the past 50 are ingrained in virtually every investor's mind.

The rest, it depends where you are, obviously.

 
Aug 23, 2015 - 11:25pm

right on the money post - this is why I keep coming back to find little gems like this!

"I'm talking about liquid. Rich enough to have your own jet. Rich enough not to waste time. Fifty, a hundred million dollars, buddy. A player. Or nothing. " -GG
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