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In Tweets: The London School of Economics Alternative Investment Conference Hedge Fund Day

Tue, 24 Jan 2012 07:08:00 GMT

Yesterday was a very enjoyable day at the London School of Economics Alternative Investment Conference. The focus of the day was hedge funds (as opposed to Private Equity which is happening today) and all in all I have to conclude that for students and young professionals with an interest in fund management this is definitely worth making an application for this time next year.

The speakers I saw were all pretty good and in a couple of cases brilliant; the venue and facilities were top-notch, if a little crowded at times; but perhaps the most interesting aspect - for me at least - were the sheer numbers of smart finance students, both graduates and undergraduates, and the potential for networking. Thanks to those of you who gave me your cards with a view to a future interview - I'll be in touch in the next couple of weeks.

As an experiment, I did some live tweeting on @moneyscience and @hedgefundfocus with the hash tag #lseaic. This was a surprisingly satisfying experience, not totally unlike a performance of some kind. It turns out that parsing and compressing a half hour talk into 140 character segments is no mean feat, but I did manage to capture most of what I heard, even if some points were a little incoherent. As a result, the transcript of tweets below has been edited a little for sense and grammer and a couple of additional points to improve the flow. Otherwise this is a pretty accurate reflection of what happened on the day.

If any of the speakers would like to contribute their slides, then feel free to get in touch with me: jacob@moneyscience.com.

General Notes

  • This is primarily a student conference. The vast majority of attendees are finance undergrads and post-grads.
  • Georgetown student told me about Georgetown Hedge Fund, run by students. Apparently this is quite common in US, not so elsewhere.
  • Unsurprisngly, most delegates are men, but the mix is truly international. Vast majority are self-funding from what I can gather. All applied for their place.
  • "It's worth it if you make just one connection" is a view I've heard a few times.
  • You might be interested in this Video from last year's event - Hugh Hendry at the LSE Alternative Investments Conference
  • No Press allowed: 'Best Trade Idea' with Steven Drobny, Christian Levett, George Papamarkakis & Dr. John Porter.
  • Interesting chat with 1 delegate who was looking to get into Hedge Funds after taking finance degree as mature and previously being professional poker player. More on this later.


Gillian Tett, US Managing Editor, Financial Times

May we live in interesting times: a journalist's reflection on financial markets

  • First up, Chris Polk, Director of the Financial Markets Group at the LSE welcomes everyone to "the largest hedge fund conference on on the planet" and introduces Gilliant Tett.
  • Gillian's background is in social anthropology. She asks the audience to raise their hands: Vast majority of delegates with backgrounds in finance, about 30-50 with Math / Hard Science backgrounds. Humanities - about 5.
  • Globally, the issue of income disparity is becoming pretty important, as are issues of social fabric.
  • 'Hippy' questions such as those asked in social anthropology and social science are becoming increasingly important, yet historically investors / ratings agencies have downplayed these issues.
  • Political risk used to be attached to developing countries and banana republics. No longer.
  • If you talk to ratings agencies now, they are not just looking at the numbers, but social fabric / politics.
  • S&P downgrade statement about France very revealing about agency issues. Classic metrics no longer rule.
  • In assessing a country, 3 C's are important: Credit, Cohesion and Character.
  • Credit: very few people used to take a view of the big picture - trapped in bunkers.
  • Before 2007 - Finance marked out by high level of trust. 3 pillars of faith: rating agencies, banks and clever models, regulators.
  • Presents interesting analogy with priests speaking latin; people take comfort in incense and the pope, Alan Greenspan!
  • Trust shattered by Lehmann crisis. Modern finance shattered. Faith in government then replaced faith in finance.
  • But now that trust in government is also cracking. Evidence seen in bond markets; and also global surveys which also report: trust in media up slightly, trust in banks down, trust in tech and social media, up.
  • Trust in government collapsed! And some of these results were reported in FT today.
  • Oddly, only country where trust in government is up - Ireland!
  • Cohesion in society - becoming extremely important. Note: GDP - Debt wordwide at 90% - as at the end of WW2.
  • Can governments find a way to deal with debt while retaining cohesion?
  • The history of Japan in the last 15 years: Everyone participating in sacrifice in a way that helps social stability, sharing pain to ensure buy-in.
  • Japanese figures haven't looked good, but social system has maintained stability. As opposed to America!
  • US has been fixated on permanent growth and 'growing the pie' but there has been a lack of social discourse on how to divide the pie up, or share the pain in periods of negative growth.
  • This lack of discourse has created political incoherence in US. They are out of practice and this is a cultural handicap.
  • Ireland is slightly exceptional in the Eurozone, and in Gillian's mind exhibitis a high degree of social cohesion.
  • Greece, historically, has been fundamentally a 'clientist' society. patronage important, the rich protected the poor, and Brussels became the new patron for a time.
  • Curious generalisation: Greece has a transactional view of loyalty.
  • Looking at the Eurozone from a US perspective - purely on the numbers - it is easy to be cynical.
  • It is hard to find a Hedge Fund Manager in US, who ever believed in the Eurozone. Certainly not now.
  • Gillian is conscious of the 'vision' of Euro leaders, their strong belief in holding things together,
  • The problem is that the bulk of the population, done't share the belief of the leaders. Skepticism is rising almost everywhere.
  • One of the reasons UK has been successful in creating austerity plan is because expectations in UK were already rock-bottom low! "Grudging Resignation"!
  • The biggest reason, though is the Electoral cycle - compared to US, UK has a 5 year cycle. In EU much worse, completely unsynchronised.
  • There are 11 elections in Eurozone this year alone!
  • It is no surprise to Gillian there is 'grinding angst' across the region. Uncertainty in markets is also inevitable... What does all this mean?
  • No one quite trusts that the world isn't going to collapse. A generation of people needs to look beyond spreadsheets to 'hippy' subjects!
  • Gillian finished.
  • Jacob here. 'Generation Flux' is an interesting term. Will 'hippy' subjects really help us deal with 'uncertainty'?
  • I've got this completely absurd image of Finance, like Woody Allen, in therapy.
  • If social science can inform finance, we need to be pretty selective about what social science... there is a huge amount of bunk out there.


Peter Clarke, Man Group

Related Article: Uptick rule could curb quant fund risk: Man Group CEO

  • Next up, Peter Clarke from Man Group, to deliver todays Keynote.
  • A few misconceptions about hedge funds: They are Risky, highly leveraged, have long lock-ups, opaque
  • Much harder to tweet lots of graphs and figures! I wonder if I can get hold of Peter's slides.
  • The key thing that hedge funds have learned is to market themselves as offering risk diversification rather than absolute returns.
  • Question: Why do people invest in hedge funds? Not simply because of broader diversification options. Long term structural trends continue to drive demand.
  • So what happened in 2011? 2 things: volatility 'fear index' - 70% higher, and volumes, 30% lower. Makes for difficult environment.
  • Europe is also an issue. Hedge funds are comfortable with many complex environments, but geopolitics are fundamentally difficult.
  • Hedge fund leverage levels are significantly below other financial participants. Hedge funds progressively reduced leverage over the crisis period.
  • There is still a huge amount of deleveraging to come in banks. So what do investors make of it? They are resigned, pragmatic, demanding.
  • Investors are screaming for liquidity! Hedge fund liquidity offering range across the spectrum but they are constrained by regulation sometimes.
  • Irrespective of performance, though, investors do want regulation, they are concerned about conterparty issues, risk budgets and the denominator effect.
  • All of this does play into the hands of hedge fund community.
  • Investors expectations: transparency most important, more than performance which remains important. Manager selection not so important.
  • Industry is addressing transparency expectation at all levels, especially with Managed accounts while UCITs also have strict governance associated.
  • Global investor demand comes in different shapes. US pension funds have different requirements to EU / Middle East / Japan - all different.
  • Not all hedge fund content is available in UCITs, but UCITs often do outperform.
  • Japanese investors are interested in Yield. Man Group's single biggest market is Japan - you can produce in subdued environments.
  • On hedge fund content: You can unbundle - infrastructure, risk managment, managed accounts - Man Group offers a wide variety of services.
  • Most important factor for industry moving forward. Uncertainty in regulation; consolidation for managers; transparency, liquidity - and fees.
  • Argument for bigger fund managers: Breadth and depth of resource, experience and capability key to maintaining competitive in environment like the current market.
  • Assets have concentrated with a smaller group of institutional quality firms as the industry has matured.
  • Taking questions. There are almost no strategies where the manager won't disclose 'theme', usually not positions however.
  • That degree of transparency won't change.
  • The illiquid end of market will generate higher yield. Fundmanetally, people pay for liquidity.
  • If an investor wants liquidty, most hedge funds will keep liquidity.
  • You don't get a much more sever regulator than that in Singapore. In asia, more transparency means banks can hold more Hedgfe Fund assets. Thus transparency is a bonus for funds.
  • How useful are academic studies / research for hedge funds? Behavioural finance very interesting. Liquidity studies too.
  • Both inform algotrading and #hft. Quant strategies and research very useful, Man invest a lot in them. (see: Oxford-Man Institute of Quantitative Finance - Jacob)
  • The concern around quant strategies is born of lack of understanding. The 'Flash crash' was a 'fat finger' crash Peter says. (Is that true? - Jacob)
  • Peters says, we need to watch #HFT closely. It is very difficult to determine was is excessively fast / acceptably fast.
  • The market requires maximal types of investors to maintain stability. Excluding participants creates instability.
  • (This seems counter-intuitive to me. How can an increase in complexity result in an increase in stability? - Jacob)

"There's a big debate - are they providing liquidity or are they taking liquidity? My personal view is they're not really providing any liquidity because they don't take positions over the end of the day... The solution to this ultimately is to have tons of market participants... People trying to participate in the trade in nanoseconds, people who have got 30-year time horizons, people who don't care about liquidity, people who care passionately about liquidity...As soon as you start excluding a short seller or a margin seller or a levered player or a faster player then you start to destabilize things." - Peter Clarke, Man Group


Kristof Bulkai, Thames River Capital

What makes a good hedge fund manager?

  • 3 qualities a successful investment manager should have: Common sense, awareness of psychology and a knowledge of history.
  • Investors need to be like Sherlock Holmes! "A flexible contrarian with real knowledge".
  • Starting with Common Sense: Businesses make money because people buy their products. Compare #apple vs #nokia
  • Discussing telecoms. Notes exponential growth in data traffic due to data intensive smart phones, we are approaching Shannon limit.
  • Companies are now able to control usage through pricing. Telecoms are Bulkai's highest conviction long trade. This just common sense.
  • Highest conviction shorts are in commodities / base metals - due to recent bull market, and demand from China steadily rolling over.
  • China's fixed asset investment can't be maintained and switching to domestic consumption is less commodity intensive.
  • Food and Water are exceptions to commodity story. Soft commodities have suffered from lack of investment.
  • Another key driver of Bulkai's strategy is the global rise of the middle class. All of this get's tied back to Common Sense.
  • On to an awareness of Psychology as a Hedge Fund manager trait. Markets not rational... (and again we get back to behavioural finance - Jacob)
  • Self awareness important, awareness that all participants are experiencing what you are, awareness of bubbles - with a nice graphic.
  • (Echo's the conversation I just had with the former Professional Poker Player)
  • Kristof uses Xcelera inc as an example of a concept stock which he lost a lot of money on at University.
  • Finally, knowing history also an important trait. History informs on the range of possibilities. (pretty obvious stuff - Jacob)
  • Nice example of currency debasement, historically an old trick, and being used now by governments in indebted countries.
  • Describes 3 scenarios, the worst of which is where governments run out of stimulus options... a universal bond crisis.
  • (This talk is not really about the traits of a good investor, or at least not very directly, or helpfully - Jacob)
  • (I'm not sure that history is, by itself, helpful. You need to tie that with some analysis of what is useful history - Jacob)
  • In Question session: Is Apple a bubble?
  • Answer: Do you believe they will break into emerging markets? Can Android replace them? Is Nokia redeemable?

Claude Porret, 47°N Capital Management

David vs. Goliath: Risk and Reward of Early-Stage Hedge Fund Investing

  • Claude has 20 years + experience in the industry (and he's a she! - Jacob)
  • Kicks off with analysis of industry outlook press coverage, which is almost entirely negative - given this, do you really want to get into this industry?
  • Screening early stage managers on chance of raising assets: 47°N starts out with 1000 managers, only 2% actually picked as investable funds.
  • What's the rationale behind investing in early-stage managers and the next generation? They are under-researched, they have more favorable investment terms...
  • The are nimble, have greater flexibility, can move in and out of positions faster. They have an ability to exploit niches and the 'wealth effect' hasn't set in.
  • Early stage managers pay attention to fund expense ratios and tend to avoid herd mentality that is prevalent in established managers.
  • Returns of smaller / emerging managers are superior according to Claude's chart, but she concedes that other charts will be different. No consensus here.
  • A disadvantage: Emerging managers have a higher incidence of fund death / drop out.
  • Models of emerging managers: The incubation model within larger firms. Strong support from larger body.
  • Seeding model: In this model the manager sells part of future revenue for equity stake.
  • Usually $30m to $100m under management, revenue of 20-30% given up in this model.
  • Acceleration model: Usually more experienced manager > reaches the magic $100m mark with revenue sharing at 20-30%.
  • Much less risk with seeding model than fund of fund model in Claude's opinion. A few profitable funds will pay for multiple blow-ups.
  • (Sounds very much like private equity / venture to me - Jacob)
  • Distinction between profitable funds and 'walking dead' - and funds where pre-emptive action is required.
  • How to sell your fund to investors: Do your research, know your potential investors: Bear in mind the 3 P's, politeness, persuasion, persistence.
  • Be straightforward, know your offering memorandum, avoid cliches (robust, unique, collective experience or a big name association)
  • Brevity - get straight to the point; improve your presentation skills and explain strategy cleary; focus on process not outcomes.
  • Finally, expect professionalism from Investors - and that they will understand what you tell them if you ar clear.
  • The role of an early /seed investor: Support with documentation, marketing, risk reporting, legal requirements;
  • Business issue support with service providers, fee levels, expense policy - also provide references (good or bad) for other potential investors.
  • Assistance with Corporate Governance issues, alignment of interests, control of assets and transparency (of course all of this is strongly in the seed funds interest- Jacob)
  • Early stage investors: Madoff is not an option due to intensive contact and verification processes.
  • (Yup, I think it's fair to say you'd have to be far cleverer than Madoff to get one past Claude - Jacob)
  • Concluding: Challenges and risks of early stage managers: Higher business risk, more hand holding and higher degree of monitoring requiring.
  • On the upside: Early stage mangers tend to outperform older, larger peers; there is quality capacity going forward; there are better terms for investing and Corporate Governance.
  • (That was my favourite talk of the day so far - Jacob)


Randall Dillard, Liongate Capital Management

A career in hedge funds

  • Randall Dillard has spoken at this event several times before his backround in finance is broad from investment banking to private equity to fund of funds.
  • Asset management is a $40trillion industry: 3 pillars to the current environment:
  • Aging populations in the west encourage funds to focus on risk mitigation; the biggest fear of baby boomers is outliving their savings.
  • Second pillar is emerging markets, transforming the geographical base of asset management. This is where the future is.
  • Third pillar: Evolution, this is a large industry, it is changing and emerging markets are becoming key. In the next 30 years the industry will need alot of new talent to manage.
  • Globalisation increases investment complexity. You need to be smarter now than you did in the 60s / 70s.
  • Comparing hedge funds with long only funds: Higher returns / lower risk. Profiting when markets are down is a significant advantage
  • Gives example in the internet bubble, it is quite clear in this case that funds were still outperforming indices. Using fund of funds as a proxy.
  • Economics and markets strongly influence strategy selection. Portfolio's must stay current or ahead of the changing markets.
  • There are 2 ways to do this: 1. call market direction - very hard, very risky. Starting off your career in a bear market is an advantage.
  • 2. Mitigate risk through your selection of instruments, hedging, shorting. Construct more sophisticated portfolios.
  • Over time, through regulation, long only funds will look more like portfolios.The future looks more like hedge funds. The Industry will grow.
  • Key survival traits for industry and a career in finance: Bear in mind that the average MD in a bank lasts 18 months!
  • Hedge fund require talented people with general skills, and of course there is a huge demand for specialized skills.
  • 3 ideas: 1. Find a good mentor! Saves time; reduces learning time and career risk, competitive advantage.
  • 2. There is also no substitute for hard work in the Finance industry - this is a trait more than a skill. There are no shortcuts here. It takes time to develop the required skills.
  • 3. Stay hungry, people who aren't tend to get moved aside very quickly. Losing focus is a mistake.
  • Work near the office! You don't want to be the guy / gal watching the clock to catch the train home. Don't let others eat your lunch!
  • Between 8 and 10 years into your career you should be aspiring for ownership / equity of the work you're doing.
  • People don't pay attention to the value they create. Stay aware but remember you are stronger in a team.
  • Dillard concluding with the quest for compensation. You are awarded for your ability to create value.
  • Thus every year you survive in finance makes you more effective.

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