September 28, 2007 |
12:15 pm: Clint Carlson opens the conference with some thoughts … Take aways from this conference should be that the term “hedge fund” is a misnomer. It is non-descriptive and includes a variety of operations – not all of them hedged. Although the media likes to use the term, it does not really serve the industry well.
Also, Clint does not believe hedge funds are an alternative asset class. Hedge funds invest in stocks, bonds, options and other derivatives. In fact, Cint does not see hedge funds as being alternative at all.
I’m sitting next to Eric Wormser of Starboard Capital here in Houston. He informs me that they have spun off their options strategy. They still run their long/short fund as well.
12:30 pm: Roger Harris, Porter Orlin, NY … talking about Long/Short Equity
Alex Porter founded the firm in 1976. Paul Orlin joined in 1994. Firm principals have a high proportion of their own net worth invested in the fund. Since 1994, they have been negavily correlated to the market because of short book.
Talks about A.W. Jones who founded the hedge fund industry in 1949.
Goes over basics of shorting … fundamental challenges, their are several … includes risk of exposure. Can only make 100% on short side but lose multiples if position goes up. Shorting mechanism (borrowing stock) is well developed here in the USA, but is a challenge in other markets. Short squeeze is a risk. Management of the company you are shorting always knows more than you do about their business. They can always buy back stock.
Relates some stories of companies/stocks they have invested in — including a speech recognition company that Microsoft invested in. MSFT evidently invested a billion USD in the company — which turned out to be a complete fraud.
Shorting does not guarantee that the fund is hedged. Correlation is important. Correlations= between sectors/markets/stocks.
Pairs trading: do hedge out macro economic risk. Have to be quick and nimble to execute this well.
Investors should look for hidden leverage in a long/short managers’ funds. Some managers only include the value of investments.
50% of trading on NYSE is some kind of program trading. Try to look 18 to 24 days out. The longer one can stretch out the time horizon the more advantage one can gain over the market - in their opinion.
Reviews some long holding of their fund and investment process. Would watch out for oil services companies. Oil at $82 but natural gas storage levels are very high and subject to risk.
1: 30 pm … Tracy Maitland of Advent Capital Management … Convertible Arbitrage
Got over bought two years ago by hedge funds. The market compressed and there was a bit of shakeout. This was good as the integrity of the market improved. Increased volatility is good for converts — they have an embedded equity option — raises value, similar to options.
Basic strategy is buy the convert security which provides higher yield than equity. Sell short underlying stock.
Converts have dual otionality on equities and volatility. Allow more equity like returns with a fixed income-like profile.
For the astute investor — converts present good opp to generate alpha. Overlooked asset class.
Advent uses a multi-strategy approach: volatility, event driven, short, income converts, international, options overlay.
2:55 pm: Kevin Coldiron of Algert Coldiron Investors (San Fran) … Mult-Factor Quant Equity
Quant tools are used to enhance the process rather than drive it as the media seems to believe. Forecasting returns involves exploiting the decision patterns of other market participants: under reaction to news in the short term, over reaction to news in the medium term, anchoring on simple metrics (can create potential for being misled or manipulated), non-investent constrainst - imposed by institutional investors or by other asset managers.
Sees the strategy as attempting to model human behavior — something every economist tries to do. Behavior finance is one thing, but how do you design and test the factors? Do you only consider historical performance? You can go back many years here in the USA, but do you want to? How much data do you consider? Should the factors be considered on an equal basis?
Quants try to take the emotion out of the buy and sell decisions. Look for a lower hit rate but more coverage. This is opposed to stock pickers — their skills are not scalable. [A friend of mine told me recently that humans are not scalable — here is an example]
Stock pickers sacrifice depth for breadth. Quants try to hedge out risks that are not being explicitly forecasting. How to do this?
Situation in August … long period of success prior drew in many new participants. Capacity esitimates failed to account for what others were doing. Many of the newer participants were using high levels of leverage, not committed to quant strategies as business, they were easiest to close ….
Future of Quant equity … short term tug of war … headwinds: money flows out of the space via redemptions; set against opps created by exposure unwinding. long term … less crowded space, fewer participants running the strategy like a short-term prop trading port.
Kevin loves running his hedge fund. It is a business like any other. Was with Barclays Global investors for 8 years prior. Wanted to focus on quant market neutral and be world class at it. Loves the people they have — no drawdowns on that front. Much of their research focuses on what other managers are doing, particularly long/short guys — how this might affect prices.
3:50 pm: Jim Dondero, Managing partner and president of Highland Capital (Dallas): Distressed Investing
Dondero is wearing jeans and an untucked shirt. I already like this guy. I’ll try to get a photo of him later and upload it to Flickr.
Oversees 40 billion in the distressed strategy …
What is going on now? Fixed income price declines 5 to 35 points, volatility, margin calls, commercial paper failing to roll, fed lowering rates … higher underwriting standards, higher rates - more stringent terms, lower advance rates, less liquidity … lower asset prices ….
Sees distressed as a better than average hedge fund strategy going forward.
Highland’s approach … choose good business with upside post bankruptcy, select entry points carefully, revamp management teams … couldn’t get the rest as he is moving thru the presentation so quickly. Says they take a more hands on approach with management than typical distressed players. Sees the hedge fund business cooling down. World doesn’t need 10,000 managers. In aggregate, the returns versus the fees doesn’t make for a rosy scenario for the hedge fund market.
Sees pension managers seeking ways to do synthetically what hedge fund managers do. For folks looking to get into the business … Says there is little work/life balance. Divorce rates are very high. But if you love finance and you are dedicated, you can make a couple of hundred million for yourself.
compensation … Wall Street … no bonuses on the sell side this year. New York firms are massively over staffed. In the hedge fund space, most managers seem to have nine lives. Private equity — they have high water marks — not down too much. General economic malaise is coming ….