Hedge fund manager, a long only fund and a Nobel prize winner in Economic “Sciences” are flying north to present to a client in New Zealand. As the plane lands they see one purple sheep alone in a field.
Professor Passive says “Kiwi sheep are purple! I must buy them all now. At any price the farmer asks, no matter how expensive or overvalued. No need to know sheep business or earnings. Forget about analysis or due diligence. Ignore risk! Prices are always right as markets are efficient. It’s not my money. I have academic tenure and a Nobel prize. Risk free…for me.”
Long only dude says “Some kiwi sheep are purple but the professor says they all are. I am benchmarked to the index so I must also buy that sheep regardless of price. Can’t risk tracking error and not being fully invested or pension consultants will remove me from their recommended list. It’s not my money either. I get paid the same whether clients win or lose.”
Hedge fund manager says “That sheep MIGHT be purple but nothing should ever be bought without regard to price. Unlike you I invest as a prudent man does. You guys are breaking fiduciary duty. Doing no analysis before buying the asset! What are the outrageous fees your clients pay for your “work” actually getting?
My clients are retirees, widows, orphans and foundations serving good causes so I MUST do more analysis than you. Interests are aligned as all my savings and my family and friends’ money is in the fund. I study potential investments much more closely than you. It’s my duty unlike you asset gatherers. I’m ONLY paid well if I make money for clients that need RELIABLE RETURNS.
There seems to be a sheep, one side of which appears to be temporarily purple. This may be due to chemicals in the sheep-dip, an accident with dye or paint, an optical illusion, a practical joke or a smudge on the airplane window. I will closely study sheep fundamentals and talk to many shepherds, shearers and wool merchants.
My quant team will gather extensive ovine market data and conduct rigorous statistical analysis, mathematical modeling, stress tests and scenario simulations. Perhaps, after exhaustive research, I might be able to decide whether to short sell or even buy that apparently purple sheep, depending on its value.
The Nobel Foundation, the professor’s university and long only dude’s pension plan became clients of mine because they need the absolute returns I consistently deliver irrespective of market direction or economic growth. You can’t buy food, pay faculty or meet liabilities with relative returns in bear markets. Professor Passive’s employer doesn’t invest a cent in his beloved index funds. Too risky and expensive.”
Which fund would YOU invest in? Who should get the mandate? Who is most likely to generate the most RELIABLE risk-adjusted returns? Whose fees represent the best VALUE for the work? What manager is really the “cheapest”?
Would an investor truly following the prudent man rule choose an index fund given the fiduciary duty for due diligence in selecting appropriate investments for beneficiaries? Passive funds that do no security analysis or risk management are a clear breach of fiduciary duty.
Which fund offers alignment between client and manager interests? “Cheap” index funds are the joke. The more conservative you are the more you need in quality hedge funds. Index firms pay “experts” outrageous fees to push “low cost” high risk unskilled toxic waste. Of course the endowment that pays their university salaries avoid passive like the plague.
SOURCE: Hedge fund – Read entire story here.
