Posts tagged ‘hedge fund’
Women & Bosoms on Wall Street According to Jones
Billionaire hedge fund manager of Tudor Investment Corporation, Paul Tudor Jones, recently suffered from a case of foot-in-mouth disease when he addressed a sensitive subject – the lack of female traders and investors on Wall Street. Rather than provide a diplomatic response to the mixed audience at a recent University of Virginia symposium, Tudor Jones went on an unambiguous rant. Here’s an excerpt:
“You will never see as many great women investors or traders as men. Period, end of story….As soon as that baby’s lips touch that girl’s bosom, forget it. Every single investment idea, every desire to understand what’s going to make this go up or gonna go down is going to be overwhelmed by the most beautiful experience, which a man will never share of that emotive connection between that mother and baby.”
A more complete review of his unfiltered response can be found in this video:
Clearly there is a massive minority of females on Wall Street, but why such an under-representation in this field relative to other female-heavy professional industries such as advertising, nursing, and teaching? I addressed this controversial subject in an earlier article (see Females in Finance)
If there are 155.8 million females in the United States and 151.8 million males (Census Bureau: October 2009), then how come only 6% of hedge fund managers (BusinessWeek), 8% of venture capitalists, and 15% of investment bankers are female (Harvard Magazine)? Is the finance field just an ol’ boys network of chauvinist pig-headed males who only hire their own? Maybe cultural factors such as upbringing and education are other factors that make math-related jobs more appealing to men? Or do the severe time-demands of the field force females to opt-out of the industry due to family priorities?
Although I’m sure family choices and quality of life are factors that play into the decision of entering the demanding finance industry, from my experience I would argue women are notoriously underrepresented even at younger ages. For example, anecdotal evidence coming from my investment management firm (Sidoxia Capital Management – www.Sidoxia.com) clearly shows a preponderance of internship applications coming from males, even though it is premature for these students to fully contemplate family considerations at this young age.
If under-representation in the finance field is not caused by female choice, then perhaps the male dominated industry is merely a function of more men opting into the field (i.e., men are better suited for the industry)? More specifically, perhaps male brains are just wired differently? Some make the argument that all the testosterone permeating through male bodies leads them to positions involving more risk. If you look at other risk related fields like gambling, women too are dramatic minorities, making up about 1/3 of total compulsive gamblers.
Women Better than Men?
The funny part about the under-representation of females in finance is that one study actually shows female hedge fund managers outperforming their male counterparts. Here’s what a BusinessWeek article had to say about female hedge fund managers:
A new study by Hedge Fund Research found that, from January 2000 through May 31, 2009, hedge funds run by women delivered nearly double the investment performance of those managed by men. Female managers produced average annual returns of 9%, versus 5.82% for men and, in 2008, when financial markets were cratering, funds run by women were down 9.6%, compared with a 19% decline for men.
The article goes onto to theorize that women may not be afraid of risk, but actually are better able to manage risk. A UC Davis study found that male managers traded 45% more than female managers, thereby reducing returns by -2.65% (about 1% more than females).
Regardless of the theories or studies used to explain gender risk appetite, the relative under-representation of females in finance is a fact. Many theories exist but further thought and research need to be conducted on the subject.
However, before Paul Tudor Jones is completely demonized or sent to the guillotine, let’s not forget Tudor Jones is obviously not your ordinary, heartless, cold-blooded Wall Street type, as evidenced by his recent philanthropic profile on 60 Minutes. Thanks to his generous efforts, Tudor Jones and his Robin Hood Foundation charity have raised more than $400 million for worthy causes since 1988.
While Paul Tudor Jones may not have harbored any malicious intent with regards to his comments, it may make sense for Tudor Jones to take a course on gender sensitivity. Bosoms and women may be an interesting subject for many, however he might consider filtering his commentary the next time he speaks to a large symposium recorded on the internet.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
See also:
BusinessWeek article on female fund managers
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Paulson Funds: From Ruth’s Chris’s to Denny’s
Investing in hedge funds is similar to eating at a high-priced establishment like Ruth’s Chris’s (RUTH) – not everyone can eat there and the prices are high. In dining terms, John Paulson, President of Paulson & Co. (approximately $34 billion in assets under management), may be considered the managing chef of the upper-crust restaurant. But rather than opening the doors of his funds to an elite few, Paulson is now making his select strategies available to the masses through a much more affordable structure. Or in other words, Paulson is opening an investing version of Denny’s (DENN), in addition to his Ruth’s Chris, so a broader set of investors can buy into his funds at a reasonable price.
Hedge funds typically are reserved for pension funds, endowments, wealthy individuals, or so-called “accredited investors” – individuals earning $200,000 annually, couples earning $300,000, or people with a net worth greater than $1,000,000. By using alternate structures, Paulson will be able to bypass the accredited investor regulatory requirements and reach a more expansive audience.
UCITS Added as a New Item on the Menu
How exactly is Paulson opening his hedge fund strategies to the broader public on a Denny’s menu? He is assembling what is called a “Ucits” structure (Undertakings for Collective Investments in Transferable Securities). These investment vehicles, adopted in 1985, resemble mutual funds and are domiciled in Europe. Although Ucits have been used by relatively few hedge fund managers, Paulson is not the first to institute them (York Capital, Highbridge Capital Management, BlueCrest Capital, and AHL are among the others who have already taken the plunge). According to the Financial Times, Paulson’s Ucits funds will launch later this year. Part of the reason this structure was chosen over others is because the regulations associated with these structures are expected to be less stringent than other onerous regulations currently being discussed by the European Union.
Will the Investing Mouths be Fed?
Should this move by Paulson be surprising? Perhaps Andy Warhol’s quote about everyone being famous for 15 minutes is apropos. Paulson’s $15 billion subprime housing profits in 2007 (read The Greatest Trade Ever) were a handsome reward and now he is attempting to further his wealth position based on this notoriety. Do I blame him? No, not at all, but time will tell if he will be viewed as a one-hit wonder, or whether his subprime bet was only an opening act. More recently, Paulson has been vocal about his seemingly peculiar combination of bullish wagers on gold and California real estate, which he sees rising in price by +20% in 2010 (see Paulson on California home rally). With his optimistic outlook on the U.S. markets and economy, his gold play apparently is riding on the expectation of a future inflation flare up, not another financial meltdown, which was the catalyst that catapulted gold prices higher in late 2008 and throughout 2009.
I’m not sure how many domestic investors will participate in these Ucits investments, however I am eager to see the prospectuses associated with the funds. Like most hedge funds, caution should be used when investing in these types of vehicles, and should only be used as a part of a broadly diversified investment portfolio. For most investors, my guess is the Paulson funds will have an attractive price of entry (i.e., availability), much like a Denny’s restaurant, but the quality and fee structure may be as desirable as a $5.99 greasy steak and pile of gravy-covered mash potatoes.
Read the Entire Financial Times Article on Paulson’s Ucits Launch
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
*DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct positions in RUTH, DENN, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Sidoxia Introduces “Fusion”
With the quote machines taking a temporary breather, what better time than now to talk about a new product creation from Sidoxia Capital Management – Fusion. For those readers following Investing Caffeine for some time, you likely have an informed understanding of Sidoxia Capital Management’s investment philosophy (www.Sidoxia.com). Well, now Sidoxia has formalized its investment product through the introduction of Fusion, a hybrid product integrating low-cost, tax-efficient investment vehicles and strategies, including individual stocks, individual bonds, equity ETFs (Exchange Traded Funds), and fixed income ETFs. Rather than being boxed into a simplistic life cycle fund, Fusion offers a customized investment vehicle that can meet investors’ wide ranging objectives and constraints. A key differentiating component of Fusion is its inclusion of some of the same stocks and securities employed in the Slome Sidoxia Fund (a hedge fund also managed by Sidoxia Capital Management for accredited investors). The aim of Fusion is to maximize the risk-adjusted returns in the context of a broadly diversified balanced portfolio (including international exposure).
Client Product Process
For those qualified investors, a one-on-one interview is conducted with each separate account investor to determine the objectives and constraints associated with the account. Subsequently, a customized Investment Policy Statement (IPS) is created for each client, effectively creating a blueprint for how the account will be managed. Depending on the risk-tolerance, time horizon, and objectives of the client, an equity allocation will be customized to meet the client’s needs. The balance of the portfolio will be invested in fixed-income, cash/liquid assets, and hybrid securities – including convertible bonds and alternative investments on a more limited basis. Individual security selection is derived from implementing fundamental and quantitative screening tools, leveraging the investment experience of the investment manager (Wade Slome), and the ranking of securities on a risk-adjusted valuation basis. Lower ranked securities are generally used as funding sources for purchases of higher ranked investment candidates.
Buy Discipline
A systematic, disciplined process is performed before the inclusion of any security is finalized into a portfolio. With respect to the selected equity securities, particular emphasis is placed on valuation metrics, including cash flows, earnings growth, dividend yields, price-earnings ratios, and other important fundamental statistics. In regards to equity related exchange traded funds (ETFs), some of the previously mentioned factors will be considered in addition to a top-down view of a funds underlying long-term growth potential. The buy discipline, established for the fixed income allocation of the portfolio, carefully considers dynamics such as yield, duration, maturity, income, inflation-protection, currency risk, and other factors. Compared to other competing domestic-centric products, Fusion has the ability and willingness to invest globally to explore attractive risk-reward investment opportunities abroad.
Portfolio Construction
Within the parameters of the various Fusion product versions (aggressive, conservative, and moderate), each portfolio is constructed with flexibility in meeting the unique objectives and constraints of each account – including any liquidity or income requirements indicated by the client. Every portfolio is constructed from the same menu of underlying investment options, thereby assuring relative consistency across accounts. Allocations across investment selections will vary based upon the Fusion product version selected.
Trading Strategies
Under normal economic circumstances, Fusion invests with a long-term time horizon of three to five years for its equity positions. As a result, factors such as transaction costs, impact costs, opportunity costs, bid-ask spreads, tax consequences, are considered before conducting trades. Regarding fixed income portfolios, the previously mentioned factors along with the underlying yield, duration, and fundamental factors will determine the holding period. Trading frequency may fluctuate, depending on financial market and client-specific circumstances, but generally speaking heightened volatility will lead to additional opportunistic portfolio activity.
Sell Discipline
The Fusion sell discipline is fairly straight forward. If a security reaches a designated price target, provides an inferior risk-adjusted return profile relative to other opportunities, or if the original investment rationale negatively changes, then the investment becomes a sell candidate. If Fusion discovers opportunities with superior investment characteristics, the sell candidates, in addition to cash, will be utilized to fund new purchases.
Product Fee Structure
The annual fee charged for portfolio management services is rendered on a percentage of assets under management basis. As a fee-only investment advisor, inherent incentives are built-in to preserve and grow client account values – a principle not practiced by many commissioned based brokers/advisors. Contact a Sidoxia Capital Management representative by phone (949-258-4322) or e-mail (info@Sidoxia.com) to learn more about Fusion’s fee structure and account minimum threshold.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
*DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct positions in any security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
John Paulson and the “Gutsiest” Trade Ever
Although the pain and suffering of the 2008-09 financial crisis has been well documented and new books are continually coming out in droves, less covered are the winners who made a bonanza by predicting the collapse of the real estate and credit markets. Prizewinning Wall Street Journal reporter Gregory Zuckerman decided to record the fortunes made by hedge fund manager John Paulson in his book The Greatest Trade Ever (The Behind-the-Scenes story of How John Paulson Defied Wall Street and Made Financial History).
Paulson’s Cartoonish Cut
Zuckerman puts Paulson’s massive gains into perspective:
“Paulson’s winnings were so enormous they seemed unreal, even cartoonish. His firm, Paulson & Co., made $15 billion in 2007, a figure that topped the gross domestic products of Bolivia, Honduras, and Paraguay…Paulson’s personal cut was nearly $4 billion…more than the earnings of J.K. Rowling, Oprah Winfrey, and Tiger Woods put together.”
As impressive as those gains were, Paulson added another $5 billion into his firm’s coffers and $2 billion into his personal wallet over 2008 and early 2009.
There are many ways to skin a cat, and there are countless strategies used by the thousands of hedge fund managers looking to hit the jackpot like Paulson. John Paulson primarily made his multi-billion fortune thanks to his CDS positions (Credit Default Swaps), the same product that led to massive multi-billion bailouts and government support for various financial institutions.
Bigger Gamble than Perception
One surprising aspect I discovered from reading the book was the uncertainty surrounding Paulson’s negative real estate trade. Here’s how Zuckerman described the conviction level of John Paulson and Paolo Pelligrini (colleague) as it related to their CDS positions on subprime CDO (Collateralized Debt Obligation) debt:
“In truth, Paulson and Pellegrini still were unsure if their growing trade would ever pan out. They thought the CDOs and other risky mortgage debt would become worthless, Paulson says. ‘But we still didn’t know.’”
Often the trades that cause you to sweat the most tend to be the most profitable, and in this case, apparently the same principle held.
Disingenuous Dramatic License
Before Paulson made his billions, Zuckerman uses a little dramatic license in the book to characterize Paulson as a small fry manager, “Paulson now managed $1.5 billion, a figure that sounded like a lot to friends outside the business. But the firm was dwarfed by its many rivals.” Zuckerman goes on to call Paulson’s hedge fund “small potatoes.” I don’t have the industry statistics at my fingertips, but I’ll go out on a limb and make an educated guess that a $1.5 billion hedge fund has significantly more assets than the vast majority of hedge fund peers. Under the 2 and 20 model, I’m guessing the management fee alone of $30 million could cover Paulson’s food and shelter expenses. Before he struck the payload, the book also references the $100 million of his personal wealth he invested with the firm. I think John Paulson was doing just fine before he executed the “greatest trade.”
What Drove the Greatest Trade
Hind sight is always 20/20, but looking back, there was ample evidence of the real estate bubble forming. Fortunately for Paulson, he got the timing generally right too. Here are some of the factors leading to the great trade:
- CDO Leverage in Subprime: By the end of 2006, the subprime loan market was relatively large at around $1.2 trillion (representing around 10% of the overall mortgage market). But thanks to the introduction of CDOs, there were more than $5 trillion of risky investments created from all the risky subprime loans.
- Liars & Ninjas: “Liar Loans” loans based on stated income (using the honor system) and “ninja loans” (no income, no job, no assets) gained popularity and prevalence, which just led to more defaults and foreclosures in the mid-2000s.
- No Down Payments: What’s more, by 2005, 24% of all mortgages were completed with no down payment, up from approximately 3% in 2001. The percentage of first-time home buyers with no down payment was even higher at 43%.
Overall, I give kudos to Gregory Zuckerman, who spent more than 50 hours with John Paulson, for bringing something so abstract and homogenous (a skeptical real estate trade) to life. Zuckerman does a superb job of adding spice to the Paulson story by introducing other narratives and characters, even if the story lines don’t blend together perfectly. After reading The Greatest Trade Ever I came away with a new found respect for Paulson’s multi-billion dollar gutsy trade. Now, Paulson has reloaded his gun and is targeting the U.S. dollar. If Paulson’s short dollar and long gold position works out, I’ll keep an eye out for his next book…The Greatest Trad-er Ever.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds (including VNQ), but at time of publishing had no direct positions in companies mentioned. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Strong Advice from Super Swensen
Playing the financial markets is a challenging game, and over the last decade we’ve witnessed events we will never see again in our lifetimes. Through these muscle aches and pains, listening and paying attention to powerful, seasoned industry veterans, like David Swensen, becomes paramount. Mr. Swensen has proven his durability – he has managed the Yale endowment for 24 years and has overseen the growth of the university’s portfolio from $1 billion to $17 billion. For the decade ending in June 2008, the Yale portfolio averaged an incredible 16.3% annual return.
So what commanding advice does Mr. Swensen have to share? Here are a few nuggets regarding equities as discussed in his May interview published in The Guru Investor (TGI):
“With a long time horizon you should have an equity orientation, because over longer periods of time, equities are going to deliver better results,” he says. “If they don’t, then capitalism isn’t working. And we could well be at a point where investments in equities are going to produce returns going forward that are higher than what we’ve seen in the past five or ten years.”
I find it difficult to argue with him. Perhaps we still have a ways to go, but the equity markets had an explosion after the 1966-1982 hiatus. Perhaps the 2000-2009 period isn’t long enough to mark bottom, but at a minimum, the spring is coiling based on history.
When it comes to diversification, TGI summarized Swensen’s asset allocation as follows:
“He recommends that investors have 30% of their funds in U.S. stocks, 15% in Treasury bonds, 15% in Treasury Inflation-Protected Securities, 15% in Real Estate Investment Trusts, 15% in foreign developed market equities, and 10% in emerging market equities. As investors get older, they should keep this type of allotment for a portion of their portfolio but begin to decrease the size of that portion, putting part of their portfolios into less risky assets like cash or Treasuries.”
Many investors were taking excessive risk in 2008 (within their asset allocations), and they were not even aware. Let’s hope valuable lessons have been learned and investors adjust the risk levels of their portfolios as they age.
David Swensen (Michael Marsland/Yale University)
Mr. Swensen has some choice words for the mutual fund management industry as well:
“The problem is that the quality of the management in the mutual fund industry is not particularly high, and you pay an extraordinarily high price for that not-very-good management,” he says. Swensen cites one study performed by Rob Arnott that measured mutual fund performance over a two-decade period. The study found that you’d have had a 15% chance of beating market after fees and taxes by investing in mutual funds — and that includes only funds that were around for the entire period; many other weaker funds didn’t last, meaning the results have a survivorship bias.
Tough to disagree, and as I’ve written in the past, I believe there are only so many .300 hitters in baseball (a study in 2007 showed only 12 active career .300 hitters in the Major Leagues – highlighted in my previous Ron Baron article). Outside of baseball, there are consistent alpha generators in the market too. However, I’d make the case that identifying the alpha generators in the financial markets is much more difficult because of the extreme fund performance volatility. Even the best managers can string some bad years together.
Swensen doesn’t stop there. He expands on the reasons behind mutual fund manager underperformance:
Taxes and fees are the big culprits, Swensen says: “Why are the tax bills so high? Because turnover’s too high. The mutual fund managers are trading the portfolios as if taxes don’t matter, and taxes do matter. And they’re trading the portfolios as if transactions cost and market impact don’t matter, and they do matter. And as they trade the portfolios, basically what’s happening is Wall Street is siphoning off its slice of the pie … and that’s at the expense of the investor.”
One thing we learned from the real estate and financial bubble that burst over the last few years is that incentive structures were misaligned. Manager compensation, whether you are talking hedge funds or mutual funds, is based on too short a time horizon, and therefore incentive structures encourage abnormal risk-taking. In baseball terms, you have those that take excessive risk and swing for the mega-bucks fences (loose cannons) and the bunters (benchmark huggers) who seek the comfort of “lower” mega-bucks. Swensen is a much bigger believer in passive strategies (as am I), using passive investment vehicles like ETFs (Exchange Traded Funds).
Mr. Swensen continues his critical perspective by targeting investors too:
Individuals and institutions who buy mutual funds “take this mutual fund industry which produces a bunch of products that are not great to start with, and then they screw it up by chasing hot performance and selling after things turn cold.”
The 1984-2002 John Bogle data (Vanguard) included in my “Action Dan” article hammers that point home.
Where should investors go now?
Asked what the one recommendation he has right now for investors is, Swensen cited TIPS. “We’ve had this massive fiscal stimulus, massive monetary stimulus, and it’s hard to see how that doesn’t translate into pretty substantial inflation, or at least pretty substantial risk of inflation … down the road at some point,” he said.
Ditto, once again – I’m a believer in having some inflation protection in your portfolio. Of course there is no free lunch in the investment world, and so there are certainly some risk factors in Swensen’s alternative investment strategy (e.g. hedge funds, private equity, and real estate). Certainly, due to significant illiquidity and other factors, many of these areas got absolutely hammered in 2008.
The best investors prepare their portfolios for these strenuous times. Do yourself a favor and work on your muscle tone too – and listen to the strong advice of David Swensen.
Read the Full TGI Article Here
Wade W. Slome, CFA, CFP
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management and client accounts do have direct long positions in TIP at the time article was originally posted. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
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