Can someone, anyone, please tell me what the big deal is here? Is it a mutual fund with a limited ability to go short and use a little leverage to amplify the risk/reward profile of the fund's bets? Or is it a hedge fund with an unusually restrictive document? Basically, it is the worst of all worlds, IMHO. Neither fish nor fowl. If the manager is really great at picking shorts, which is really the hardest part of the long/short game, then why would they choose to play in a pool that is limited to being only 30 short? Answer: they wouldn't. They would go to a place where they could use their shorting skill to its fullest, namely, in a real hedge fund, not some bastardized, watered-down version. So, basically we're talking about adverse selection in action.
Conversely, what of the skilled long-only manager who wants to try his/her hand at shorting to add a little spice to life (not to mention the ability to garner premium fees)? Buyer beware: this is a train wreck waiting to happen. The road is littered with managers who had strong returns in the long-only modality who tried to switch to a hedge fund that entailed shorting and got totally smoked. Why? The risk management principles (position sizing, number of bets, stops, liquidity, etc.) are fundamentally different on the short side than on the long side. There is no shame in not having this skill, but don't pretend that you can simply acquire it because you are a good long investor. Shorting is a different game - a dangerous game - that needs to be learned over time. Otherwise, you'd better have some strong glue at your disposal since it is almost certain that you're going to get your face ripped off.
So what is the deal with 130/30 structures? Why are they all the rage? Well, because of their limited ability to short, they have much greater capacity than true hedge funds and can grow to a much larger scale. What is good for the asset manager is not so good for the investor, you see. Charge hedge fund-like fees, have greater capacity, yet have it operated by B-type managers as those are the only ones who would willingly agree to such portfolio constraints. This is everything that is wrong with the asset management game, when the push is for asset gathering and not true alpha generation. Simply giving a broader array of investors access to a hedge fund-type vehicle doesn't make it good; it makes it good marketing. And good marketing does not make for good investing. And if I've said it once I've said it a thousand times: caveat emptor. Because being a hedge fund-lite investor isn't as sexy as you think.
http://www.informationarbitrage.com/2007/05/13030_hedge_fun.html
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