Quote for the article:
"...the fund missed both of Apple's big 2012 rallies -- in April when it hit $644 and in September when it hit $705. Zaky lost nearly nearly 50% of the fund's capital in one month (March) by buying bearish put spreads just before the stock rose 10%..."
(Source: http://tech.fortune.cnn.com/2013/03/04/apple-zaky-bullish-cross/)
This is from the same analyst who often forecasted earnings better than wall street analysts for many years. It was this ability that drew investors and commentators'-awe. He was spot on for so many years - what happened?
The short answer: he went all-in on one derivative position (aapl calls). The long answer - he confused predictions with the ability to manage money. And he wasn't the only one, with up to 700 newsletter subscribers which paid up to $200/month (same article). It's never just about hit-rate - it's how much you make when you are right and how much you lose when wrong (simple probability no?). The problem is correct calls are what make the headlines (and dare I say get you investors?).
An institutional level equivalent could be Paulson & Co. - he made 1 giant call correct and investors flooded in. The result? $15 billion of gains in 2007 were nearly overwhelmed by roughly $13 billion of losses 2011 (I did assume net flows of 0 that yr). Paulson can still claim +10% etc. time-weighted returns, but dollar-weighted, e.g. how much money investors have actually made? I think it is far less (dare I say negative?).
This is not an indictment of either person/firm- they have definitely made a real impact in the world (far more than I) and may continue their profits. I do believe, however, that investor focus on % correct and famous calls are not good predictors of fund performance. what do you guys think?
Disclosure: no position in aapl
Hello Stanley,
ReplyDeleteI stumbled across this by pure chance, and their certainly are some interesting comments. I certainly would echo what you've said that investors focus too much on famous calls. It has become part of a more systemic issue, there was an article in the FT a couple of months ago about how do you choose an asset manager? The answer was that again and again it was the firm branded the best rather than who had performed well over a time horizon greater than a year.
This is partly why some asset managers tolerate average returns because there money is not made, on how their portfolio performed rather the size of their AUM. You would hope that the two were correlated and that improved performance in a firm would be accompanied by increased AUM, but that is not usually case, with well known firms, receiving a disproportionate increase in AUM relative to their performance.
I had quick question though, what brought about this post?
Thanks in advance,
Peter
Hi Peter,
ReplyDeleteThank you for commenting! Reading about Andy Zaky and the millions he was able to raise based on the calls he made as analyst led me to write this post. What was crazy is the hundreds of people who paid for newsletters and ultimately invested their money based admittedly good predictions about one stock. Similarly, Paulson, who I think is the institutional equivalent didn't become well-known until a great macro call that panned out. The problem, I believe, is that people think that making correct calls = long term ability to manage money. Pension funds admins/managers feel safe investing in a well-known fund because the cocktail conversation is great - "I'm invested with the guy who shorted housing!" Fundamentally, I believe that that is not a useful way to invest, but the growth in his aum into the billions shows I am in the minority.
With this backdrop, I totally agree with you that most asset managers and even most hedge funds these days are mostly just asset gatherers.
A combination of noisy in investment skill and the short-sightedness of asset allocations combined with the principal-agent problem (your mutual manager != you).
On the other hand, this does provide possible opportunities for those more focused on long-term performance (while managing drawdowns etc.), because there is plenty of "dumb" money?
-Stanley
Hi Stanley,
ReplyDeleteNo worries, I don't think there are enough informed blogs on investment so it's great work you're doing. Those are some great insights, and the point on cocktail conversations is certainly true. Whilst there is a lot of "dumb money" in the market how do investors position themselves to take advantage of the switch to "smart money" if you will, when people begin to realise their achieving sub standard returns particularly after management fees ins ome cases.
Agreed - that switch is hard to pinpoint. For finding investment managers/opportunities then, one thing that I think is useful is the proper alignment of incentives.
ReplyDeleteFor example, a fund manager of any sort, especially the aggressive kind, should have a substantial part of his net worth in it as a normal investor. Furthermore, he/she should have a history of putting his money own down and doing well, i.e. not just throwing his cash around.
Buffett did this with his partnership with no performance fee (I believe), and 25% performance fee only after a 6% hurdle. He didn't get paid unless he outperformed.
This leads to a second point - outperformance should matter. I'd rather a hungry and semi-well off person investing rather than a billionaire. If the billionaire losses 10$mm, that's nothing, 1% of money he'd probably never really need anyways.
On the other hand, a $1 million net worth person who invests 200k in such an opportunity, w/e it is, ,and has made money so far in his previous investments (to get to that $1mm), that makes far more sense.
Thank you Peter for your words! Good to know my writings are helpful.
ReplyDelete