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re: Getting Past the Gate: Capital Introduction at Prime Brokerage Firms
Posted on 10/10/14 at 5:53 am to Doc Fenton
Posted on 10/10/14 at 5:53 am to Doc Fenton
Thursday, December 18, 2014
As I return, I present to you my favorite quote of all time:
Billy: You remember the stories John use to tell us about the the three chinamen playing Fantan? This guy runs up to them and says, "Hey, the world's coming to an end!" and the first one says, "Well, I best go to the mission and pray," and the second one says, "Well, hell, I'm gonna go and buy me a case of Mezcal and six whores," and the third one says "Well, I'm gonna finish the game." I shall finish the game, Doc. ( LINK from Young Guns II)
Picking up from Section III...
III-A. Hedge Funds and Hidden Beta (revisited)
I wanted to return to this sub-category for a bit due to a really interesting piece Clifford Asness of AQR Capital wrote on his hedge fund's website on October 24, " Hedge Funds: The (Somewhat Tepid) Defense." There have certainly been a lot of articles in the financial media over the past couple of years decrying the sub-par performance of hedge funds in recent years, such as by that arrogant blowhard Barry Ritholtz. Asness, however, rebuts the argument quite well, and explains from basic points of portfolio theory why hedge funds are still a quite useful investment class, despite the apparent lack of alpha given the level of beta in recent years. Specifically, he notes with very useful charts the correlation part of the equation that critics like Ritholtz miss, and shows that although, yes, hedge funds oversell their ability to generate alpha, there is a huge service to investors for them being able to generate whatever paltry levels of uncorrelated alpha they are still able to do.
III-B. High Frequency Algorithmic Trading Strategies (revisited)
I was going to revisit this sub-section to illustrate a link to a QuantNet thread highlighting pros and cons to using Fortran vs. C for algorithmic programming, which just tickled me pink because I learned to code using Fortran in high school, but somehow I can't find the link anymore, and I guess it's not really that relevant anyway... just something that was personally noteworthy to me in a funny kind of way.
III-C. Other Quantitative Strategies: The EMH vs. Fama-French & Shiller's CAPE
You know, there are a bunch of different approaches one could take to this topic, but at the risk of going to the same well too many times, I will once again defer to a recent piece by Cliff Asness, because his December 17 post on this subject, " Our Model Goes to Six and Saves Value From Redundancy Along the Way," addresses cutting-edge research on this topic so well, and in such a widely accessible way to the general (somewhat sophisticated) investing public, that you really can't do any better.
In particular, he focuses on recent (September 2014) academic journal publications of Eugene Fama and Ken French on their famous three-factor model, which everybody learns in business school, and which they now expand to a five-factor model. Hence the Asness title about taking the five-factor model to 6 factors, since the entire career of Asness is mostly based on his PhD thesis research on the use of momentum as a valid factor in this model, and explaining to all who will listen how it is best used in conjunction with the value factor due to the benefits deriving from the negative correlation of the premia from those two factors under differing macroeconomic conditions. Really cool stuff.
III-D. Recent Work of Clifford Asness and Others
Because I just cited Asness twice to make points in 2 of the subsections above, this is now mostly irrelevant, although he has made quite a good living from his original PhD thesis that value and momentum work best as investment strategies when used in tandem. In any case, I highly recommend reading his Cliff's Perspective section on the AQR Capital website, which is similar in a way to Bill Gross's monthly outlooks, except that Cliff's is much more quantitative, high-brow, and educational with regard to the elite levels of sophisticated hedge fund investors.
As for "others", well we just covered Fama & French above too, and most everything else besides that (at least on the quantitative side of things) is algo trading, which is just not that interesting to me.
On the activist side of things, Ackman & Icahn & Soros offer some interesting perspective. From Ackman, that he is better at what he does than what you might suspect by reading how the financial media portrays him. From Icahn, that shareholder democracy is a false ideal. From Soros, that many great investors purposefully make profits by riding momentum on the upside of bubbles, knowing full well that the underlying assets are being mispriced for the long-term by the transitory investing environment.
III-E. Current Trends
You know, the more I think about it, the more I realize that I just don't understand a lot of what goes on in the industry, most especially what goes on related to short-term trading prop desks. I know that several of the posters here are traders of some form (a few energy traders, right?), and there are interesting stories out there (see e.g., how Andrew J. Hall managed to make money in 2014, despite being long oil LINK, because he was also long on the US dollar), and there are great historical stories and advice, like how George Soros won big betting against the Bank of England on the value of the British pound (and about how Soros claims that betting WITH bubbles on purpose during the run-up is how he makes a good bit of his profits), but really, prop trading is still a foreign world to me.
But I do understand basic trends and concepts related to the trade, such as the carry trade related to the Japanese yen, and event-driven M&A investing, or activist investor LBOs (a topic near and dear to my heart, especially as it relates to dudes like Carl Icahn, Kirk Kerkorian, and William Ackman), and I do certainly recognize the current bloat in the hedge fund industry.
Regarding the current bloat, and the concomitant sub-par returns that we have been witnessing in the industry, it seems clear that a major shake out is in the cards, whereby the wheat will be separated from the chaff, and a lot of clown impostors will go bust once the era of disinflation and easy money starts to come to an end. That much is well known.
What is (slightly) less well known is the degree to which the big fish are eating the small fish in the hedge fund world. So not only is the industry bloated and producing a lot of mediocre funds, but there is also a clear trend towards superior alpha being generated by the behemoths of the industry rather than by the smaller fish. Does this mean that being nimble and imaginative and fresh will no longer work going forward? I wouldn't say that, but it does give me pause as someone who is trying to break into the hedge fund industry as a small-time entrepreneurial player. The data seem to be saying that the world already has enough people like that as it is.
As I return, I present to you my favorite quote of all time:
Billy: You remember the stories John use to tell us about the the three chinamen playing Fantan? This guy runs up to them and says, "Hey, the world's coming to an end!" and the first one says, "Well, I best go to the mission and pray," and the second one says, "Well, hell, I'm gonna go and buy me a case of Mezcal and six whores," and the third one says "Well, I'm gonna finish the game." I shall finish the game, Doc. ( LINK from Young Guns II)
Picking up from Section III...
quote:
III. STRATEGIES FOR GENERATING ALPHA
A. Hedge Funds and Hidden Beta
B. High Frequency Algorithmic Trading Strategies
C. Other Quantitative Strategies: The EMH vs. Fama-French & Shiller's CAPE
D. Recent Work of Clifford Asness and Others
E. Current Trends
III-A. Hedge Funds and Hidden Beta (revisited)
I wanted to return to this sub-category for a bit due to a really interesting piece Clifford Asness of AQR Capital wrote on his hedge fund's website on October 24, " Hedge Funds: The (Somewhat Tepid) Defense." There have certainly been a lot of articles in the financial media over the past couple of years decrying the sub-par performance of hedge funds in recent years, such as by that arrogant blowhard Barry Ritholtz. Asness, however, rebuts the argument quite well, and explains from basic points of portfolio theory why hedge funds are still a quite useful investment class, despite the apparent lack of alpha given the level of beta in recent years. Specifically, he notes with very useful charts the correlation part of the equation that critics like Ritholtz miss, and shows that although, yes, hedge funds oversell their ability to generate alpha, there is a huge service to investors for them being able to generate whatever paltry levels of uncorrelated alpha they are still able to do.
III-B. High Frequency Algorithmic Trading Strategies (revisited)
I was going to revisit this sub-section to illustrate a link to a QuantNet thread highlighting pros and cons to using Fortran vs. C for algorithmic programming, which just tickled me pink because I learned to code using Fortran in high school, but somehow I can't find the link anymore, and I guess it's not really that relevant anyway... just something that was personally noteworthy to me in a funny kind of way.
III-C. Other Quantitative Strategies: The EMH vs. Fama-French & Shiller's CAPE
You know, there are a bunch of different approaches one could take to this topic, but at the risk of going to the same well too many times, I will once again defer to a recent piece by Cliff Asness, because his December 17 post on this subject, " Our Model Goes to Six and Saves Value From Redundancy Along the Way," addresses cutting-edge research on this topic so well, and in such a widely accessible way to the general (somewhat sophisticated) investing public, that you really can't do any better.
In particular, he focuses on recent (September 2014) academic journal publications of Eugene Fama and Ken French on their famous three-factor model, which everybody learns in business school, and which they now expand to a five-factor model. Hence the Asness title about taking the five-factor model to 6 factors, since the entire career of Asness is mostly based on his PhD thesis research on the use of momentum as a valid factor in this model, and explaining to all who will listen how it is best used in conjunction with the value factor due to the benefits deriving from the negative correlation of the premia from those two factors under differing macroeconomic conditions. Really cool stuff.
III-D. Recent Work of Clifford Asness and Others
Because I just cited Asness twice to make points in 2 of the subsections above, this is now mostly irrelevant, although he has made quite a good living from his original PhD thesis that value and momentum work best as investment strategies when used in tandem. In any case, I highly recommend reading his Cliff's Perspective section on the AQR Capital website, which is similar in a way to Bill Gross's monthly outlooks, except that Cliff's is much more quantitative, high-brow, and educational with regard to the elite levels of sophisticated hedge fund investors.
As for "others", well we just covered Fama & French above too, and most everything else besides that (at least on the quantitative side of things) is algo trading, which is just not that interesting to me.
On the activist side of things, Ackman & Icahn & Soros offer some interesting perspective. From Ackman, that he is better at what he does than what you might suspect by reading how the financial media portrays him. From Icahn, that shareholder democracy is a false ideal. From Soros, that many great investors purposefully make profits by riding momentum on the upside of bubbles, knowing full well that the underlying assets are being mispriced for the long-term by the transitory investing environment.
III-E. Current Trends
You know, the more I think about it, the more I realize that I just don't understand a lot of what goes on in the industry, most especially what goes on related to short-term trading prop desks. I know that several of the posters here are traders of some form (a few energy traders, right?), and there are interesting stories out there (see e.g., how Andrew J. Hall managed to make money in 2014, despite being long oil LINK, because he was also long on the US dollar), and there are great historical stories and advice, like how George Soros won big betting against the Bank of England on the value of the British pound (and about how Soros claims that betting WITH bubbles on purpose during the run-up is how he makes a good bit of his profits), but really, prop trading is still a foreign world to me.
But I do understand basic trends and concepts related to the trade, such as the carry trade related to the Japanese yen, and event-driven M&A investing, or activist investor LBOs (a topic near and dear to my heart, especially as it relates to dudes like Carl Icahn, Kirk Kerkorian, and William Ackman), and I do certainly recognize the current bloat in the hedge fund industry.
Regarding the current bloat, and the concomitant sub-par returns that we have been witnessing in the industry, it seems clear that a major shake out is in the cards, whereby the wheat will be separated from the chaff, and a lot of clown impostors will go bust once the era of disinflation and easy money starts to come to an end. That much is well known.
What is (slightly) less well known is the degree to which the big fish are eating the small fish in the hedge fund world. So not only is the industry bloated and producing a lot of mediocre funds, but there is also a clear trend towards superior alpha being generated by the behemoths of the industry rather than by the smaller fish. Does this mean that being nimble and imaginative and fresh will no longer work going forward? I wouldn't say that, but it does give me pause as someone who is trying to break into the hedge fund industry as a small-time entrepreneurial player. The data seem to be saying that the world already has enough people like that as it is.
This post was edited on 12/31/14 at 7:30 pm
1
Posted on 10/10/14 at 5:54 am to Doc Fenton
Monday, December 29, 2014
IV. ASSEMBLING A MARKETING TEAM
A. Targeting Investors
B. Events
C. Road Shows
D. Databases
E. Industry Publications
ASIDE: So I'm doing a shite job of pulling this thread together at the end, but I suppose that's what happens when you take a new and complicated subject and try to pick up where you left off months ago. I'm pulling my hair out trying to find all these old links to interesting tidbits about people who still code in Fortran for algo trading, and various ways of hiding beta for hedge funds, and stuff like that. In the grand scheme of things, though, I guess none of it really matters too much, because the main point of all this was just to get the ball rolling in my mind with some actual organized thoughts on how I might start a hedge fund one day within the next 5 years or so. So no matter how well I try to do this, it will never be perfect enough, and real world knowledge will quickly blow to hell anything I try to construct here anyway, so with that said, it's high time for me to finish the fricking game, which brings us to our last section...
IV. ASSEMBLING A MARKETING TEAM
A. Targeting Investors
There is nothing fancy about this part. A startup hedge fund simply needs to (i) develop a prospective investor list, (ii) gain access to members of the list and prioritize prospects as part of a winnowing down process, and (iii) actually close and convert prospects into investors. Arguably, sub-sections (B)-(E) are all about (ii), and doing (iii) is simply a matter of channeling your inner Don Draper.
It all starts with a list though, the sources of which can be roughly divided into internal databases and external databases. Internal databases would just be a formal name to all your informal social contacts, although there is some schmoozing that can be done here to get introduced and linked to acquaintances of acquaintances. College alumni clubs, local chapters of charitable organizations, referrals from colleagues in the industry you went to school with, etc.
Obviously though, I wouldn't be creating this thread if I were an insider who could generate a decent insider's database of internal personal contacts, so my main focus is on external databases for fresh mavericks trying to break into the industry, and for that, we have specific firms that sell these lists: Brighton House LLC; Prequin Ltd.; Investor Source; etc.
(As for following up on leads and closing on investors, that might be more of a salesmanship topic better addressed by the great " OFFICIAL: Sales Professionals Strategy and Discussion Thread" thread of August 2013.)
B. Events
This is similar to the process by which internal databases are built, except here there are formal industry events where strangers mingle with strangers. My old boss went to this type of event for European private equity firms in Monaco last year, and I know there are lots of "Shark Tank" type stories of events where angel investors mingle with aspiring startup entrepreneurs.
Sub-categories of "events" for our purposes can be broken down into manager hosted events (like stock idea dinners, educational discussion events, manager discussion panels, etc.), industry sponsored events, and capital introduction. Obviously, the subject of capital introductions, a service provided courtesy of the major prime brokerage firms out there, is what prompted me to create this whole thread in the first place, but there are also some interesting industry sponsored events that occur around the U.S. where aspiring asset managers can mingle and look for potential investors: at the Milken Institute (in May in Los Angeles); at AlphaMetrix (in Miami); IMN, Alpha Hedge West (in September in San Francisco); Iro Sohn Conference (in May in New York City); etc.
C. Road Shows
This naturally brings us to road shows, which is the natural next step for those aspiring hedge fund managers lucky enough to get picked up by the capital introduction team of a major prime brokerage house, and which I suppose is very similar to (but less regulated than) the road show process that typical investment bankers conduct on behalf of their corporate clients that are doing new offerings of public securities. This is also, I suppose, where aspiring asset managers get grilled on their alpha generation strategies, risk metrics, office logistics, etc.
D. Databases
The databases for this sub-section are databases used for the purpose of reporting your performance metrics relative to peers in the hedge fund industry, which is part of the process of making an argument for your alpha and beta calculations to gauge how well you think you can perform relative to the levels of risk and market correlation with which you are engaged.
Here there are a plethora of databases given, so I will just dump the list:
* Autumn Gold
* Barclay Hedge, Ltd
* Bloomberg L.P.
* Cogent Investment Research, LLC
* Credit Suisse | Tremont
* EurekaHedge, Ltd
* Evestment | HFN
* Greenwich Alternative Investments
* The Hammerstone Group
* HedgeCo.net
* HedgeFund Intelligence
* Hedge Connection
* Hedge Fund Research, Inc.
* Lipper TASS
* Morningstar Altvest
* Stark & Company
E. Industry Publications
This means industry publications where you create the content, not stuff from others that you use or read. Now of course you will want to get published in well known sources that others in the industry already know about, but the focus here is on getting the main players at your startup hedge fund to introduce themselves to the inside club of professionals here, writing white papers (you'll see a few of these often, in a wider sense, every day on RealClearMarkets.com), giving "meet the manager" types of interviews to trade publications, and offering global viewpoints, perhaps getting a positive placement in an article in the major media (WSJ or Bloomberg, for instance), or something like that. Part of this is just classical PR stuff that you might hire a firm for, and part of this is just hammering out your own unique vision into something that catches on with others that you might consider your peers. This is the sort of stuff that plays to my weaknesses, so I can't say that I know much about it, but it does seem like an interesting art. Maybe I'd like to have a publicist one day.
IV. ASSEMBLING A MARKETING TEAM
A. Targeting Investors
B. Events
C. Road Shows
D. Databases
E. Industry Publications
ASIDE: So I'm doing a shite job of pulling this thread together at the end, but I suppose that's what happens when you take a new and complicated subject and try to pick up where you left off months ago. I'm pulling my hair out trying to find all these old links to interesting tidbits about people who still code in Fortran for algo trading, and various ways of hiding beta for hedge funds, and stuff like that. In the grand scheme of things, though, I guess none of it really matters too much, because the main point of all this was just to get the ball rolling in my mind with some actual organized thoughts on how I might start a hedge fund one day within the next 5 years or so. So no matter how well I try to do this, it will never be perfect enough, and real world knowledge will quickly blow to hell anything I try to construct here anyway, so with that said, it's high time for me to finish the fricking game, which brings us to our last section...
IV. ASSEMBLING A MARKETING TEAM
A. Targeting Investors
There is nothing fancy about this part. A startup hedge fund simply needs to (i) develop a prospective investor list, (ii) gain access to members of the list and prioritize prospects as part of a winnowing down process, and (iii) actually close and convert prospects into investors. Arguably, sub-sections (B)-(E) are all about (ii), and doing (iii) is simply a matter of channeling your inner Don Draper.
It all starts with a list though, the sources of which can be roughly divided into internal databases and external databases. Internal databases would just be a formal name to all your informal social contacts, although there is some schmoozing that can be done here to get introduced and linked to acquaintances of acquaintances. College alumni clubs, local chapters of charitable organizations, referrals from colleagues in the industry you went to school with, etc.
Obviously though, I wouldn't be creating this thread if I were an insider who could generate a decent insider's database of internal personal contacts, so my main focus is on external databases for fresh mavericks trying to break into the industry, and for that, we have specific firms that sell these lists: Brighton House LLC; Prequin Ltd.; Investor Source; etc.
(As for following up on leads and closing on investors, that might be more of a salesmanship topic better addressed by the great " OFFICIAL: Sales Professionals Strategy and Discussion Thread" thread of August 2013.)
B. Events
This is similar to the process by which internal databases are built, except here there are formal industry events where strangers mingle with strangers. My old boss went to this type of event for European private equity firms in Monaco last year, and I know there are lots of "Shark Tank" type stories of events where angel investors mingle with aspiring startup entrepreneurs.
Sub-categories of "events" for our purposes can be broken down into manager hosted events (like stock idea dinners, educational discussion events, manager discussion panels, etc.), industry sponsored events, and capital introduction. Obviously, the subject of capital introductions, a service provided courtesy of the major prime brokerage firms out there, is what prompted me to create this whole thread in the first place, but there are also some interesting industry sponsored events that occur around the U.S. where aspiring asset managers can mingle and look for potential investors: at the Milken Institute (in May in Los Angeles); at AlphaMetrix (in Miami); IMN, Alpha Hedge West (in September in San Francisco); Iro Sohn Conference (in May in New York City); etc.
C. Road Shows
This naturally brings us to road shows, which is the natural next step for those aspiring hedge fund managers lucky enough to get picked up by the capital introduction team of a major prime brokerage house, and which I suppose is very similar to (but less regulated than) the road show process that typical investment bankers conduct on behalf of their corporate clients that are doing new offerings of public securities. This is also, I suppose, where aspiring asset managers get grilled on their alpha generation strategies, risk metrics, office logistics, etc.
D. Databases
The databases for this sub-section are databases used for the purpose of reporting your performance metrics relative to peers in the hedge fund industry, which is part of the process of making an argument for your alpha and beta calculations to gauge how well you think you can perform relative to the levels of risk and market correlation with which you are engaged.
Here there are a plethora of databases given, so I will just dump the list:
* Autumn Gold
* Barclay Hedge, Ltd
* Bloomberg L.P.
* Cogent Investment Research, LLC
* Credit Suisse | Tremont
* EurekaHedge, Ltd
* Evestment | HFN
* Greenwich Alternative Investments
* The Hammerstone Group
* HedgeCo.net
* HedgeFund Intelligence
* Hedge Connection
* Hedge Fund Research, Inc.
* Lipper TASS
* Morningstar Altvest
* Stark & Company
E. Industry Publications
This means industry publications where you create the content, not stuff from others that you use or read. Now of course you will want to get published in well known sources that others in the industry already know about, but the focus here is on getting the main players at your startup hedge fund to introduce themselves to the inside club of professionals here, writing white papers (you'll see a few of these often, in a wider sense, every day on RealClearMarkets.com), giving "meet the manager" types of interviews to trade publications, and offering global viewpoints, perhaps getting a positive placement in an article in the major media (WSJ or Bloomberg, for instance), or something like that. Part of this is just classical PR stuff that you might hire a firm for, and part of this is just hammering out your own unique vision into something that catches on with others that you might consider your peers. This is the sort of stuff that plays to my weaknesses, so I can't say that I know much about it, but it does seem like an interesting art. Maybe I'd like to have a publicist one day.
This post was edited on 12/31/14 at 7:22 pm
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