Friday, July 1, 2011

Hedge Fund Industry Sentiments - July 1, 2011 (Q3 begins)

Peter Douglas - the principal of GFIA (Singapore)

"In fact, I think we actually saw more opportunists come into the industry in that period [post 2008],
which worries me. We meet managers who see the business opportunity more clearly
than the investment edge: “well, two and twenty is a great model, we will give the
business three years; if it’s not really profitable after three years we will go back and
work for Morgan Stanley”, or wherever they came from."


My thoughts:

1. 2/20 is not a great model
2. We will see a trend reversal; sell siders who failed at speculation go back to sell side
3. Its really eerie how dead on he is with some of my thoughts.

What Peter talks about is very interesting and dear to me. Often the managers he may encounter are young ambitious young guns who worked for big financial institutions who want to take  a stab at the "Get quick rich schemes of the HF" industry. I would often think these are guys who were the cream of the crop of "target universities," who have only "succeeded" to get where they are. Though, I should not generalize, I would like to believe these are the people who have yet to taste bitter failure or have yet to feel the pains of loosing their own capital to the throws of the market.

To succeed in this industry, to succeed in markets, one has to painstakingly craft his skills and competitive advantage over the years. Bar all metaphysical/post-modernist/philosophical ideas of what is and what is not, there is no escaping this route. Trying to take a shortcut will lead to disaster and undesired outcomes.

The truly scary idea is that newcomers trying their hand at the game will be so reckless in thoughts and actions to let "potential opportunity" impede their ability to perform their fiduciary responsibilities. Also! Let us not be fooled by those who have amazing institutional contacts who can get millions of dollars off the bat to mask weak infrastructures and safeguards meant to protect investors. People will only need to spend a small percentage of fund resources to outsource operations and supposedly build proper risk management infrastructures. For sure all the money in the world can build a great piece of machinery, but what is the use if you don't know how to properly use it? So what use is the manager who doesn't understand the fine nuisances of his business since everything was handed to him so easily?

Well perhaps this is too much of an oversimplification. People who would attempt to start hedge funds surely would not be ignorant, incompetent, or inexperienced right? Or perhaps its more of the case of being either 1. ignorant or 2. being a very clever fellow. Type 1 people who will face disaster and Type 2 people who will have some sort of success.

With this in mind, I too and guilty at times! I think in my weakest moments in building a hedge fund, when the hard became harder and the harder was harder than the hardest, I have actually thought similar sentiments that Peter Douglas was condemning. That being, "Oh if my hedge fund fails, I am young and I can always get a job."  Reading Douglas's comments was just a very clear reminder that I am in this business for the long run. Yes, I am extremely young for this industry, so if I do fail it is an experience to carry through to my next HF venture that will make it stronger and better. That is what the sentiment in my mind should reflect. The reason why I started my venture in this industry because of the entrepreneurial spirit required, because of the mental challenge of markets, and because I have such a strong desire to build and create and help others.

Though if markets have taught me anything, we may like to think in absolutes... that is until we are absolutely wrong. Change is definitely abound, and being young there are more paths to cross than roads to follow. For now at least, I am sticking to the plan.

Analyze Capital LLC

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