"There are times when the burden of taking other people's money forces you to be active when you don't really have conviction. It gives you a sense of pressure and expectation. When it's your own money you don't have to do anything."
- Tony James, President of Blackstone, commenting on Stanley Druckenmiller's decision to wind up his hedge fund. As reported in The Financial Times.
The Investment Commentary will shortly be taking its summer holiday. It will return, on Monday 20th September.
As capsule summaries of 'agency risk' go, the one above takes some beating. As any honest trader will confirm, being forced to be active without conviction is a licence to lose money. Doubly so in such a convictionless market as the one in which investors are now becalmed. Henny Sender's article ("The letter that shook hedge funds") for last Thursday's FT cites a hedge fund executive similarly bemoaning the apparent lack of alpha male assuredness in alternative asset management:
"Nobody is sending out definitive 'this is my view' letters these days. Nobody has any conviction. We go through rallies and we go through sell-offs and nothing is well sustained."
Well, tough. Above the noise of the world?s smallest violin playing on behalf of the hedge fund community, nobody ever promised them, or anyone else, a rose garden. If the author of the anonymous quote above had been a traditional banker, we could at least have gone onto an extended rant about moral hazard, moral bankruptcy, and the sad triumph of a parasitic underclass that has gone on to devour its host and much of the rest of the economy. As it is, all we can suggest is that in such an apparently challenging market, those who can manage risk should now thrive at the expense of the hordes of overpaid chancers who pollute the ranks of the supposedly homogeneous hedge fund sector. The problem is most acute in the world of so-called global macro funds. In more tightly defined strategies, say credit arbitrage, you make the best – and the worst – from the asset universe available. But in global macro the investible universe is pretty much infinite; there is arguably too much choice, if there can be said to be such a thing. And if a lack of conviction were really warranted, each of those choices today essentially represents an opportunity for the active manager…
