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From The Economist magazine, February 16, 2012: The lexicon of hedge funds: From alpha to smart beta
In line with the rest of our industry we are making some changes to the language we use in our marketing and communications. We are writing this letter so we can explain these changes properly. Most importantly, Zilch Capital used to refer to itself as a “hedge fund” but 2008 made it embarrassingly clear we didn’t know how to hedge. At all. So like many others, we have embraced the title of “alternative asset manager”. It’s clunky but ambiguous enough to shield us from criticism next time around.
We know we used to promise “absolute returns” (ie, that you would make money regardless of market conditions) but this pledge has proved impossible to honour. Instead we’re going to give you “risk-adjusted” returns or, failing that, “relative” returns. In years like 2011, when we delivered much less than the S&P 500, you may find that we don’t talk about returns at all.
It is also time to move on from the concept of delivering “alpha”, the skill you’ve paid us such fat fees for. Upon reflection, we have decided that we’re actually much better at giving you “smart beta”. This term is already being touted at industry conferences and we hope shortly to be able to explain what it means. Like our peers we have also started talking a lot about how we are “multi-strategy” and “capital-structure agnostic”, and boasting about the benefits of our “unconstrained” investment approach. This is better than saying we don’t really understand what’s going on.
Some parts of the lexicon will not see style drift. We are still trying to keep alive “two and twenty”, the industry’s shorthand for 2% management fees and 20% performance fees. It is, we’re sure you’ll agree, important to keep up some traditions. Thank you for your continued partnership.
Zilch Capital LLC
In our book, a prudent fiduciary would not place investing clients (speculative clients are another thing) with active money managers, given the very low odds of success over time. Ignorance of the voluminous research supporting this position is no excuse. However, certain concepts promoted by advisors who use active strategies are sound nevertheless. In this video, HighTower Advisors does a great job of explaining the difference between brokers and fiduciaries through the use of a whiteboard animation. Enjoy!
Many managers of actively-managed mutual funds in the late 1990s, who were frustrated with underperforming the market for years, loaded up on large growth, technology, and Internet stocks just prior to those stocks' collapse in 2000-2002 period. Nothing real unusual there, since active managers are notorious for coming late to the party, getting drunk on their greed, and then stumbling into the gutter to sleep it off–with their shareholders suffering the inevitable hangover. No, what's a bit unusual, is for small cap and value managers to join the party despite assuring their parents (the fund shareholders) that they would stay home and behave.
Well, unfortunately, we’re watching active fund managers behave badly once again. This time, they can’t resist Apple’s stock after it climbed to new highs and is now the biggest company in the world.
Apple Inc.'s surging shares have prompted hundreds of mutual funds to buy the stock—including many that aren't expected to invest in a giant, U.S.-based technology company that pays no dividends.
At least 50 small-cap and midcap mutual funds—which focus on small and midsize companies—own Apple, the world's largest company by market value, according to analyses for The Wall Street Journal by market-data firms Morningstar Inc. and Ipreo Holdings LLC. Non-U.S.-focused funds also own it. Apple doesn't pay a dividend, but about 40 dividend-focused funds hold its stock. And Apple shares can be found even in one high-yield bond fund.
Read more here…
An opinion piece in today's New York Times is causing a lot of buzz in the blogosphere and, being the consistent Wall Street critics that we are, we decided to post a link to it here. For more color and background, we've also provided a link to a reference to the article in today's Wall Street Journal.
TODAY is my last day at Goldman Sachs. After almost 12 years at the firm — first as a summer intern while at Stanford, then in New York for 10 years, and now in London — I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.
Read more in the New York Times here.
Goldman Sachs Group Inc., the frequent target of criticism for its aggressive pursuit of profits, again found itself in a harsh spotlight Wednesday when a London-based executive resigned from the firm in a New York Times opinion piece that assailed the firm's culture as "toxic and destructive."
Read more in The Wall Street Journal here.
It’s sure starting to look as if Jon Corzine is going to get away with it.
By now, it has been well established that Corzine’s former firm, MF Global, committed the sin of sins for a broker-dealer. In late October, during the final, desperate days before it entered bankruptcy proceedings, its executives took money from segregated customer accounts — money that belonged not to MF Global but to the farmers and commodities traders that were its clients — and used it to prop up its rapidly collapsing business. Nor was this petty cash: of the $6.9 billion in customer assets that MF Global held, a stunning $1.6 billion is missing. There is virtually no chance that the full amount will ever be recovered.
The New York Times, March 12, 2012. Read more here.
The decline of the English-speaking world has been greatly exaggerated.
It’s indisputable that the Anglosphere no longer enjoys the overwhelming global dominance that it once had. What was once a globe-spanning empire is now best understood as a union of language, culture, and shared values. Yet what declinists overlook is that despite its current economic problems, the Anglosphere’s fundamental assets—economic, political, demographic, and cultural—are likely to drive its continued global leadership. The Anglosphere future is brighter than commonly believed.
Read more in City Journal here.
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