Thursday, November 6, 2008

New Poll Up

Posted by TraderMark at 3:55 PM TweetThis
I have a new poll up and I'd appreciate readers serious opinions on this one.

Most mutual funds are 100% or nearly 100% fully invested all the time. From an institutional point of view the viewpoint is they want you to be 100% invested because your hedge fund or private equity fund or private client account is part of a larger portfolio. And they want to allocate properly. As an institution they might allocate 30% to "long only funds" so if you are one of six funds they've chosen for that purpose and you go away from 100% long - they are no longer 30% exposed to long only funds.

Now the problem with that thinking is September and October 2008. If you are fully invested and part of that 30% group of 6 funds that were chosen - you lost your investors lots of money - certainly far more than a partial cash strategy. So in theory you did what the institutional investor wanted (stay fully invested) but you cost her more money by adhering to that strict policy.

As reward for following this policy? Said institutional investor is now redeeming money out of your hedge fund (or other investment vehicle) left and right since being 100% long almost anything outside US Treasuries the past quarter led to massive losses. See how it's sort of circular? Maybe if you had held a high cash position you'd have far lower losses and you'd have hurt the allocation policy, but saved said investor from some losses. And he/she would now not be pulling their money away from you. There is irony in that.

But obviously many people reading here are retail investors and not a pension fund administrator. Let me ask you via this poll - and please don't just take the past few months into consideration where the answer is obvious. What would you prefer over the long run?

A) A fully invested fund which holds little to no cash so that you can make your allocations via asset class yourself

or

B) A fund which has it's own discretion to invest in short/long/cash - but you give up the asset allocation certainty (i.e. you don't know if that portion of your portfolio is going to be 70% long, 30% short, or 80% long, 20% cash, etc)

Again, don't just think about the past 2 months in which the answer would be weighted towards B, but from a 10 year perspective. I am curious mostly due to what type of readers I have - how their opinion would fall from these 2 choices. And how many think of a singular mutual fund within a greater portfolio in terms of "this fund goes into bucket A of allocation, that fund goes into buck B of allocation" etc.

Posted by TraderMark at 3:55 PM Comments (8) | Edit This Post | Create A New Post

8 comments:

market folly said...

think about next 5 years... volatility continues if not increases and thus b) should be preferred choice (i would assume).

be hedged like a true hedge fund is supposed to be. there's a reason that model used to work and i think it would actually be very profitable in the form of a mutual fund since they cant use leverage

i understand the thoughts of people going for a) though, they are filling an allocation in their model. thing is, there are already tons of funds that you can put into your allocation though.... mutual fund landscape is littered with them.

November 6, 2008 4:19 PM  
YY said...

The answer depends on the sophistication of the investor.

99% of investors will be better off having a hedge-fund kind of fund for their savings. In fact in retrospect it appears to me that having a Long only funds was always the wrost of all worlds for the average investor. Mind you, a closer regulation and monitoring should be applied to these funds to protect against potential abuse that result from the wider mix of Long/short/cash.

1% of investors are capable of replicating and perhaps beating the hedge funds, and they need access to long only funds. But they are the exception, indeed.

Personally, I have had a great year due to operating with a mix of long/short/cash. I lost belief in the Long only funds back in the 2000 crash.

November 6, 2008 4:20 PM  
nullpointer said...

me personally, i would never invest in a long only ANYTHING.

bottom line: if you are giving your $$ to someone to invest on your behalf, there has to be trust in said money manager. go long, go short, go to cash, i dont care...just protect my nut in bad times, and make me some money in the good times.

November 6, 2008 4:35 PM  
Himalayas said...

There are several funds that follow an allocation strategy. Some are more "balanced" than others, but they typically think in terms of asset allocation. For example, the Leuthold funds (LCORX, LAALX, GLBLX) adjust their equity allocation anywhere from 20% to 80%, and similarly for bonds, etc.

These are not as aggressive as say Heebner, in that they do not bet so dramatically. They are more disciplined.

Balanced allocation funds are the only kind of funds I invest in these days, with few exceptions.

There are other funds such as FPACX, FAIRX, that hold high cash positions as well, and these are great funds in their own respect.

I think that is where you are heading. You need to change the "Some of my favorite funds with similar strategies to me" section.

November 6, 2008 4:57 PM  
jsmckenzie said...

I like a mix of broad index funds, (VASGX), actively managed funds that have allocation discretion (FBRVX), and sector long/short leveraged ETFs. A fully invested, actively managed fund is the worst of both worlds -- during the high points, profits must be reinvested into overpriced assets, and during the lows, losses get locked in when positions change. Plus fees on top of that. If I'm going to pay fees for active management, I want a fund with a smart manager who has the freedom to take advantage of the market in different conditions.

November 6, 2008 10:09 PM  
Doug said...

I'm a pension board trustee. As a pension board trustee, of course the answer is "a". And, contrary to your post, we don't take money away from a money manager--and have not---in this market just because they are sustaining losses. We take money away from managers when we lose faith in their investment thesis, or their ability to manage money in their space. This year, we only redeemed from one hedge fund, and that was earlier in the year (February)because we didn't believe their investment style had worked.

I was on this same board as a trustee following the market meltdown in 2000-2002. We were down 29%+ during that downturn, but our fund rebounded such that our assets more than doubled from 2003-June, 2008. Had we decided in 2000-2002 to go to substantially all cash, we would have faced the decision of when to re-enter the market---ie, be right twice, both getting out and getting back in.

Obviously, we are different than an individual investor because we have a time horizon that is far longer than an individual investor, we can invest in strategies not available to an individual investor, and we have the ability in most market times to hedge risk. Of course, when the correlations of risk are as they are now at "1"---ie, everything collapses---then it doesn't really matter what your strategy is. The best you can hope for, and what we have been trying to do, is lose less than the respective benchmark.

We can and have increased our cash level, but do so at a fund level, not by letting the individual manager go to cash. And other funds are in fact increasing their cash level---see http://www.moneymovesmarkets.com/journal/2008/10/17/uk-institutional-liquidity-historically-high.html

As for myself as an individual investor, I follow my pension fund approach. If I want to raise cash, I sell a mutual fund. I haven't yet found the market timing fund that can move in and out of the market with great sucess. Even the funds that have great sucess in switching strategies, such as Heebner, often have periods where they guess wrong and give back all their gains.

November 6, 2008 11:52 PM  
thestocksurfer said...

Like a previous commenter, I no longer invest in long only mutual funds. I don't like the fees, the distributions, or the restrictions to selling (i.e. short term trading restrictions). So if I had to choose, gun to head, I'd pick B. I particularly like the portfolio management style of Roger Nusbaum, for example (and he also has a nice blog).

But I prefer managing my own money to A or B. We all have unique personalities and goals. I have found it incredibly liberating to reject the buy and hold myth and learn how to manage risk. Looking back on the days when I was in mutual funds is like looking back into Plato's Cave and wondering how I didn't realize how dark it was in there....

November 7, 2008 12:58 AM  
TraderMark said...

Thanks for all the feedback. I imagine that although this website generally attracts more individual stock pickers than mutual fund investors, even the mutual fund investors are a lot more sophisticated than the average joe who picks 4 funds in his 401k, and never really looks at expense fees, management track record, or any of that stuff. So I probably attract a different crowd which is a lot more engaged with the stock market itself, even the ones solely in mutual funds.

Doug - thanks for the opposing viewpoint. While I understand all you are saying and agree with the idea behind it, the reality is many other institutional investors are pulling money - hence the huge redemptions we are seeing everywhere. But I understand from a Harvard fund asset allocation model, the idea is to have x% in multiple non correlating asset classes and in THEORY they should not all move together - obviously the past quarter broke that theory. I still think it is a rigid way of thinking but I understand the concept and why it is, what it is.

November 7, 2008 10:36 AM  

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