Alpha Magazine Hall of Fame – The Fundamentals

by PlanMaestro

This is the Alpha Magazine Hall of Fame 2008 that includes interviews with some of the usual suspects in the hedge fund industry. I will start with some quotes of my heroes, the fundamentals (Seth Klarman, Julian Robertson, David Swensen and Alfred Winslow Jones) and leave macro traders for a later post.

Institutional Investor’s Alpha Magazine – June 2008

The Industry

  • He had two powerful ideas. One was that you didn’t need the traditional allocation of bonds and cash and all that – you can go 99% stocks, you’ll get a bigger return. Two was that you stay in there, you hang in there because you’re hedged. Those were his two things: always being in the market and having a big percentage of assets in stock – Robert Burch on Jones
  • Not having other sensible home for these non-S&P-like strategies, we decided that we would create an asset class and call it ‘absolute return’”- Swensen
  • Their clients are pressuring them for short-term results, or they think their clients want short-term results. That’s probably the biggest problem for professional managers. It makes it very, very hard for an investor to hold a stock that’s going down, to take a contrarian viewpoint – Klarman
  • The consultant’s numbers are substantially inflated by survivorship bias. When managers exit for bad performance, their records disappear – Swensen

Research

  • Every manager should be able to answer the question, what’s your edge? – Klarman
  • Max Heine was great at not looking at what something was called, what its label was. He looked at what it actually was – Klarman
  • Michael Price was fabulous at pulling threads. he would notice something, and then he would get curious and ask questions” – Klarman
  • When I got so many talented analysts, I realized it was better to go for more expensive growth stocks because the analysts could project earning well into the future – Robertson
  • I think I wised up a bit and realized it wasn’t just price that created value. If you can buy a stock at 25 times earnings that you are sure will grow at 20 percent for a long period of time, it is better value than a stock trading at seven times earnings that is going to grow at 3 to 5 percent – Robertson
  • One, dig, dig and dig deeper… Two, the value of a world-class information network … The third thing was the importance of management. Bad management with good assets can fritter value away – Touradji on Robertson
  • At Yale the most important shift in vetting hedge fund managers over the past 15 to 20 years has been in increasing focus on the character and quality of the investment principals –Swenssen
  • Human nature makes it hard for the markets to be efficient… so the questions is not, Are people smart, are people sophisticated, do they have clever ways of looking at things, are they looking in the right areas? The question is, Are there periods when none of that matters because their human natures get the best of them?

Leverage and Shorting

  • We don’t even think of ourselves as a hedge fund. We see ourselves as basically long-only investors. Unlike hedge funds, we don’t leverage the portfolio- never a nickel of portfolio leverage. We have a minimal amount of shorts currently less than 1 percent of the total assets – Klarman
  • The first thing Alfred would say about hedge fund managers today is that they are not hedged. The word is being abominated. Anybody leveraged 30 to one is not hedged – they are just using the word to get the 20 percent performance fee – Robert Burch on Jones
  • I also think leverage is a great risk. If you look at hedge fund failures, virtually all of them were on the back of excess leverage – Klarman
  • Another illusion is that short-selling is somehow more dangerous than buying a stock for a rise in price. A stock can theorically go up to infinity and down only to zero… and in both cases there is no danger that cannot be provided for by adequate diversification – Jones
  • The ability to short was where you separated the wheat from the chaff – Robert Burch on Jones

Alpha Magazine Hall of Fame – The Fundamentals

This is the Alpha Magazine Hall of Fame of 2008 that includes interviews with some of the usual suspects in the hedge fund industry. I will start with some quotes of my heroes, the fundamentals (Seth Klarman, Julian Robertson, David Swensen and Alfred Winslow Jones)

Institutional Investor’s Alpha Magazine – June 2008 – (40).

http://www.nxtbook.com/nxtbooks/ii/alpha0608/index.php?startid=40

The Industry

He had two powerful ideas. One was that you didn’t need the traditional allocation of bonds and cash and all that – you can go 99% stocks, you’ll get a bigger return. Two was that you stay in there, you hang in there because you’re hedged. Those were his two things: always being in the market and having a big percentage of assets in stock – Robert Burch on Jones

Not having other sensible home for these non-S&P-like strategies, we decided that we would create an asset class and call it ‘absolute return’”- Swensen

Their clients are pressuring them for short-term results, or they think their clients want short-term results. That’s probably the biggest problem for professional managers. It makes it very, very hard for an investor to hold a stock that’s going down, to take a contrarian viewpoint – Klarman

The consultant’s numbers are substantially inflated by survivorship bias. When managers exit for bad performance, their records disappear – Swensen

Research

Every manager should be able to answer the question, what’s your edge? – Klarman

Max Heine was great at not looking at what something was called, what its label was. He looked at what it actually was – Klarman

Michael Price was fabulous at pulling threads. he would notice something, and then he would get curious and ask questions” – Klarman

When I got so many talented analysts, I realized it was better to go for more expensive growth stocks because the analysts could project earning well into the future – Robertson

I think I wised up a bit and realized it wasn’t just price that created value. If you can buy a stock at 25 times earnings that you are sure will grow at 20 percent for a long period of time, it is better value than a stock trading at seven times earnings that is going to grow at 3 to 5 percent – Robertson

One, dig, did and dig deeper… Two, the value of a world-class information network … The third thing was the importance of management. Bad management with good assets can fritter value away – Touradji on Robertson

At Yale the most important shift in vetting hedge fund managers over the past 15 to 20 years has been in increasing focus on the character and quality of the investment principals –Swenssen

Human nature makes it hard for the markets to be efficient… so the questions is not, Are people smart, are people sophisticated, do they have clever ways of looking at things, are they looking in the right areas? The question is, Are there periods when none of that matters because their human natures get the best of them?

Leverage and Shorting

We don’t even think of ourselves as a hedge fund. We see ourselves as basically long-only investors. Unlike hedge funds, we don’t leverage the portfolio- never a nickel of portfolio leverage. We have a minimal amount of shorts currently less than 1 percent of the total assets – Klarman

The first thing Alfred would say about hedge fund managers today is that they are not hedged. The word is being abominated. Anybody leveraged 30 to one is not hedged – they are just using the word to get the 20 percent performance fee – Robert Burch on Jones

I also think leverage is a great risk. If you look at hedge fund failures, virtually all of them were on the back of excess leverage – Klarman

Another illusion is that short-selling is somehow more dangerous than buying a stock for a rise in price. A stock can theorically go up to infinity and down only to zero… and in both cases there is no danger that cannot be provided for by adequate diversification – Jones

The ability to short was where you separated the wheat from the chaff – Robert Burch on Jones

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