Confusing Sophistication with Substance

Here’s the pitch – at current valuations and prevailing interest rates, neither stocks nor bonds will offer much in the way of returns.

In the meanwhile, your pension fund has an embedded liability of high single-digits per annum, and you’ll need some pretty sophisticated strategies in order to achieve them.

We in the alternative investment community have those strategies. We’re obviously smart, and incredibly well-dressed. Our office is on 57th Street, one thousand feet above the city. Are you getting the message? 

And the kicker – taking meetings with us is going to be like visiting a salon filled with Enlightenment Age intellectuals in 18th century Paris. We’ll talk convexity and curve-steepeners and sortino ratios and term premia until the hairs on your arm stand up from the erudition and electricity in the room.

And don’t even get me started on the massive booklets of charts and data we’ll pile onto your desk. You’ll be utterly dazzled by the 4th page, in an ecstatic trance by the 400th.

Also, you’ll never be fired, because we’re on the platform. We’re on every platform. Everyone else you are benchmarked against is also using us. We’re on platforms of platforms. Forget about it.


Here’s the result, via Bloomberg:

New York City’s Employees Retirement System, whose members include sanitation workers, librarians and nurses, is one of five New York City public employee pensions. The funds had combined assets of $154.4 billion as of Jan. 31. NYCERS board is made up of trustees representing the mayor, comptroller, public advocate, five borough presidents and three unions.

Last year, NYCERS hedge fund portfolio lost 1.88 percent, lagging both the Standard & Poor’s 500 the Barclays U.S. Aggregate Bond Index. Three-year returns were 2.83 percent.

But the dinners were great.


I’m going to go out on a limb and just mention that a pension fund, or charitable fund, or endowment fund, is just a large collection of individual investors who’ve had their money pooled with the hopes of reaching specific goals. It doesn’t follow that this pool of assets should require anything more outrageously brilliant than what intelligent high net worth investors are doing.

It doesn’t require a pie graph with 65 slices. It doesn’t require being both long and short against every asset class. It doesn’t require shareholder activism or aggressive interest rate bets or a hedge against the potential volatility of every conceivable exposure.

We started an institutional division last year because we believe that sub-$100 million funds are getting terrible advice, en masse, because of what they think is necessary.

These funds do not get access to the top private equity shops, the brightest venture capital managers or the top hedge funds. Instead, they get access to the fourth best. Or the fifth best. Unfortunately, the fourth and fifth best of each of these categories still charge fees as though they’re the first best. The results are predictable: Great presentations and lots of disappointment.

And even if they could have access to the best alternatives – like NYC’s pension system surely does – would it even help?

Ben Carlson, our director of institutional asset management, came to us with a very powerful idea when we hired him: What if we could bring clarity, evidence-based investing, at a reasonable cost, to the small and mid-market funds all over the country? What if we could slice through all the artifice and showmanship with data and common sense?

Something tells me that’s where the puck is heading, where it will be in the years ahead. Something tells me Ben is onto something big. And man, was he the right person for the job. Ben’s seen every pitch imaginable, having sat on the client side of the table for ten years. He’s even enjoyed the dinner conversation.

As institutions stop confusing sophistication with substance, there will be real answers sought. Smart consultants will recognize the opportunities that exist in providing them.

Learn more about what we’re doing for this market here.

Read also:

Confessions of an Institutional Investor (TRB)

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