A quote from Jason Zweig’s piece on “High Pressure Hedge Fund Culture”:
“You should pay hedge-fund managers all that extra money so they don’t lose you a lot of your capital in bad markets,” says Elizabeth Hilpman, chief investment officer at Barlow Partners, which invests exclusively in hedge funds. “But many institutional investors want it all: They want the downside protection and the huge outperformance.”
Why bother investing at all if not to make money? You’re investing for the purpose of “downside protection”? I don’t get it…
What is the time frame and when is the final use of this money? Why is full market volatility not acceptable, so long as it gives one the full market upside? The only circumstance in which this kind of high-cost, low-volatility (supposedly) and low-return (guaranteed) approach makes sense is if the whole purpose is to make people feel “safer” on paper. Don’t worry, we’re hedged and we have multi-strat, multi-managers, gammas and thetas and shit, you’ll never lose more than the market.
I’ve seen these portfolios in real life, they’re like show ponies – beautifully groomed and manicured to a high shine, of exceptional pedigree and festooned with leather and lace. No one should be surprised that they can’t run in an actual race.
A more profitable approach would be to convince the imbeciles running all these pensions and endowments that they have an endless ocean of cash coming in and they can afford near-term volatility, so long as they are set up to make money over time. When you’ve got unavoidable and growing financial obligations projected decades out into the future, the biggest risk you can take is not to take any.
Off the record, I was just told of a big time Upstate New York university’s endowment that has a total gain off the 2009 lows of just 10%. Not annualized – 10% period over the last four years while the stock market has more than doubled. I bet they have high-paid consultants and hedge funds out the ass. They should’ve just handed the money over to a teller in the local bank branch and asked him to pick a few mutual funds.
This “downside protection” racket seems to be more about optics and the illusion of safety than it is about actual success.
I don’t understand.