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For all the small Fund Managers out here...


Palantir
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These guys were about $110M in 2010, now over a billion, all by getting the word out.

 

 

Value investing: Alpine tops $1.6 billion by getting the word out

http://www.bizjournals.com/stlouis/print-edition/2014/09/05/value-investing-alpine-tops-1-6-billion-by-getting.html

 

 

But Tompras found that a good record isn’t enough. “I had this ‘if you build it, they will come’ idea, which proved to be a bit naive,” he said.

 

“You can have great numbers but you can toil in obscurity if no one knows about them.”
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Why would you assume it is bad for clients?

 

By definition as the asset base increases the opportunity size decreases. The manager will also by definition have less time available for communicating with any one individual client. Although maybe that is a good thing, given how clients are.

 

The list of posters (including me) in this thread is interesting. All that has to happen is yadayada to join in, and then it will be the perfect list of young, idiot posters, including myself, that the old, best posters perhaps rightfully claim have completely ruined this board.

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That's interesting, I guess that is why all the great fund managers are running portfolios of sub 10M, you know, because size hurts returns. *sends David Einhorn/Seth Klarman/Ray Dalio angry emails* If you're managing more in assets, you can run multiple funds, for different client preferences, spend more resources on your work, you have access to deals small managers don't, etc. Bigger can be better.

 

 

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Sure, up to certain size big can be better. Also depends on what the manager does and how they do it.

 

*sends David Einhorn/Seth Klarman/Ray Dalio angry emails*

 

Einhorn's recent results are subpar. We will see how he does in the future.

 

BTW, Stan Druckenmiller warns about 10B IIRC asset level as being dangerous. /shrug

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Given that he has 2 consultants working for the company, they must have a lot of institutional money.  Probably the majority of their money is institutional money.  Which is very fickle.  Institutional investors chase performance.  That money could also leave very quickly as well if they have a rough 6-12 month period. 

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Point is, not everyone is hurt by larger asset bases. You guys are assuming that sub-10M managers are all killing it with 50% returns, investing in obscure, tiny securities, when in reality, a number of them are investing in things that bigger funds can. Anyways the article I linked only talks about being at about 1.6B, not 10B. Beyond 10B yes, your opportunity set shrinks.

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these guys can be a lot bigger. their avg market cap is $141B, and they own things like FFX, JPM, MSFT, JNJ, and VOD. And they are long only. Asset growth here is not an issue.

 

 

Portfolio Characteristics5

Security % of Assets

Fairfax Financial Holdings 5.7%

JP Morgan Chase 5.4%

Microsoft 5.3%

Johnson & Johnson 5.3%

Vodafone PLC 4.9%

Past performance is not indicative of future results. Disclosures are included on page 2 of this presentation.

EQR S&P 500

Price/Earnings* 14.4 27.7

Debt/Capital % 25 52

Avg Market Cap ($B) 141.0 133.6

Dividend Yield % 2.3 2.0

Avg Net Debt ($B)# 0.8

Alpha (10 yr) 4.72

Beta (10 yr) 0.73

R-Squared (10 yr) 0.75

*Price/Earnings: based on normalized

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This discussion is near and dear to my heart, so please allow a related mini-rant. :)

 

I think there are some assumptions that need to be summoned when talking about these related issue (size, performance, marketing to grow, etc).

 

#1 is what folks think the purpose of investing OPM really is. 

 

-- Is it to build a great record, is it to do the most good for the most clients (outperforming by 2% with $10B clearly better than 20% with $50m for example), is it to have fun, is it to become famous, is it to be perceived and recognized as a good investor, is it to grow a large money management firm like BEN/TROW?  I see the note about the guys going from $110m to $1.6B (presumably most of the growth is in new money)... is that good?  Are they happy?  (I understand they are based on the article).  At 1% on $110m, you make $1m+ pre-tax...

 

#2 is what folks think having more AUM means in terms of performance.

 

-- If you don't think more AUM means lower (absolute / relative percentage) returns, I don't know what to say.  I don't care if you deal only in $10B names, managing $100m is worse than managing $10m, and you can tell as a trader (actually doing the trades), and I would bet most medium-big investors can actually quantify their market impact.  Now it may be that 0.1% slippage isn't a killer, but whenever I see folks say that size doesn't matter when you are in the tens of millions, I just think they mostly haven't dealt with tens of millions (I speak not just from personal experience, but talking with folks who have grown the sums they managed into the $100's of millions).  I deal in mostly liquid names, though not always, (I have only ~$10m AUM), and I notice market impact even in $1B+ cap companies (i'm concentrated, so if you are large cap only, and highly diversified, your problems are even smaller... but I think still noticeable).  At $1B in AUM, many many issues arise... of course firms don't say this, because they have a severe conflict because they don't want to close their doors... generally.)... but it's a real issue.

 

-- I think you can make some, relatively weak, arguments that activist strategies maybe scale differently for low / high AUM, but I think that's hard to measure as activists really have counter-AUM scale more with their prominence and notoriety; but these effects are hard to separate from AUM as they are highly correlated.

 

--

 

I think it is a completely uncontroversial idea that gathering a huge amount of AUM will not happen without marketing, or a *tremendous* track record (like 10-15% annually for 7+ years)... but "huge" is relative.  The implication (at least as I read it) of the lead post is that managing $110m is not successful, or 'good enough'... if that is so, I think there are many who would be happy with that kind of non-success.  Managing $100m seems 3-4x more enjoyable than managing $1B, and yet the difference in utility of an income of $1m vs. $10m, to me at least, is essentially identical.

 

I've said it before, but I will say it again.  If you perform quietly, with no promotion, you will quickly manage a sum of money that will employ you comfortably (if you think you are a counter example of this, please PM, I would seriously love to get your story).  That # isn't $1B, but to imply that marketing is somehow required for this business I think is either:

 

a) Making an easy excuse for those who can't really perform over time, so they must market themselves

 

and/or

 

b) An insult to those who don't desire what others think folks in this business must desire (sh1t tons of money) by looking on their path of success as a failure.

 

and/or

 

c) A statement of obvious fact that yes, a good track record, when coupled with smart marketing, will always result in much larger AUM.

 

--

 

One of my heroes in this business closed (to new money) a year or two ago with $30m in AUM... said he was struggling to buy / sell and wasn't performing as well as he felt he owed his clients.

 

If he is a failure, may we have more money mangers who fail repeatedly like him.

 

Ben

 

PS - this business is filled with so many fakes, scoundrels, and talented but extremely greedy folks, I feel like a reality check is needed sometimes.  I know nothing about the Alpine guys in the article, but to seemingly belittle those managers who stick to their knitting and try to do a good job and subtly imply that their lack of extreme wealth / income / AUM is somehow a fault (when perhaps their lack of desire for marketing simply a life choice, or perhaps a truly long term self-interested decision to avoid hot money) is turning the world upside down IMO.

 

PPS - Palantir, I don't know what exact thoughts you had when starting the thread, but I'm inferring your tone based on follow up comments, and many similar discussions I've had over the years.  My note above is more in general though, not really trying to confront your perspective... as I mentioned, I think it is true (and not controversial) that if you want to grow AUM, some level of marketing is much more useful/required than great performance alone... in most cases, I would think both performance and marketing are required - but again, all money managers have their own specific goals I'm sure!).  Hope that's clear!

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If you perform quietly, with no promotion, you will quickly manage a sum of money that will employ you comfortably (if you think you are a counter example of this, please PM, I would seriously love to get your story).

 

With my +10 on your post, I'll quibble a bit with this.

I never seriously tried to get OPM to manage, so this is a bit second-hand, but it's also not totally theoretical. :)

 

I think your sentence above assumes that the investor comes from a well-to-do background with family and friends having a significant amount of money to be invested by the said investor. It also assumes that the investor is not shy/introverted (not sure what's the good word) to promote themselves to their family/friends. And also that they are comfortable to manage the money of family/friends with everything that this entails. I think all these 3 assumptions are not necessarily true:

 

- Some people come from backgrounds where family/friends don't have enough money for them to start any reasonable business. It's possible to change the circle of friends, but getting friends who will trust you money will take time (and promotion ;) ).

 

- Some people are not good in selling to the point where the track record does not matter. Sure if they do 50% a year, they might attract money. If they do +3-5% over benchmark consistently, they won't.

 

- Some people don't like to mix money with friendship. (Some people think mixing money with friendship is not an issue, but behavioral economics shows that it is). I would not manage money for my family/friends even if they asked me. ;) Well, maybe if they asked a lot. ;) Having clients who are at arms-length might also be a positive thing for some investors. But having such clients requires promotion.

 

So I think your claim above is not universal. :)

 

Take care

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Enlightening, thanks for posting. I just started my investment firm and am definitely guilty of the "if I build a track record, investors will come" mentality.

 

Indeed, I feel like I talk to a lot of guys out there who invest sub<10M, and seem to use the "I don't market" as a badge of honor. It could also be from a desire to "I'd rather focus on finding undervalued securities" rather than selling your service and building a business.

 

 

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Enlightening, thanks for posting. I just started my investment firm and am definitely guilty of the "if I build a track record, investors will come" mentality.

 

Indeed, I feel like I talk to a lot of guys out there who invest sub<10M, and seem to use the "I don't market" as a badge of honor. It could also be from a desire to "I'd rather focus on finding undervalued securities" rather than selling your service and building a business.

 

Echoing Ben, I don't think you need to market that much if you are a small operation and are just interested in investing as a profession without a boss.  Starting is a little rough as the overhead eats up quite a bit of returns at the beginning.  Also, you'll want to have a decent record together before rational people will give you money, so that will take a while.  So let's say you start at ~2 million, you take 3-5 years to get a record together.  If you've done decently well, you'll have several more million come in from new investors just from word of mouth, and you'll also presumably have increased that original money quite a bit in the mean time.  Let's say that gets you to the 6-10 million range after 5 years.  Now, you should be able to live off of the fees (or be close), so as long as you don't screw up, you really never have to worry about money again.  With a fixed fee arrangement, your salary now increases at your rate of return.  If you can run at 15%, you double every 5 years.  So 15 years in you are in the 20-50 AUM million range, don't need to worry about income, and don't have to have any additions at all.  Why bother with "selling your service" or "building your business" (as if you haven't built it already at this point)?

 

Disclosure: I'm in year 2 in this process with ~3 million AUM, launched with 1.8 million AUM.

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The list of posters (including me) in this thread is interesting. All that has to happen is yadayada to join in, and then it will be the perfect list of young, idiot posters, including myself, that the old, best posters perhaps rightfully claim have completely ruined this board.

 

Oh, I can think of one "older" poster who needs to join in, tell his philosophy for the 412th time, along with stating a belief that the wonderful investors will outperform because they are wonderful, their AUM doesn't matter.  Then it will be perfect.  ;D

 

Back to topic - it is interesting that their outperformance is so pronounced, given their portfolio holdings. 99% of the portfolio in top 12 holdings, only one of which isn't a very large company.

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It depends on what your goal is.  A number of folks want to focus on the investment side of the business with no ambition to be the next star manager and become rich off fees charged to others but to make enough to live off of and have others share the fund expenses.  BTW that was the original reason for asset management (to cover investment costs institutions incurred in research not to make large AM fees).  This I think can provide some interesting advantages to investors because once the fees level reaches a level of paying for expenses they don't have to increase.  So once your AUM reaches a certain level, you can refund some of your fees to your clients.

 

Packer

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It depends on what your goal is.  A number of folks want to focus on the investment side of the business with no ambition to be the next star manager and become rich off fees charged to others but to make enough to live off of and have others share the fund expenses.  BTW that was the original reason for asset management (to cover investment costs institutions incurred in research not to make large AM fees).  This I think can provide some interesting advantages to investors because once the fees level reaches a level of paying for expenses they don't have to increase.  So once your AUM reaches a certain level, you can refund some of your fees to your clients.

 

Packer

 

Keith, if you go on your own, let me know. I'll be happy to let your run my money!

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Enlightening, thanks for posting. I just started my investment firm and am definitely guilty of the "if I build a track record, investors will come" mentality.

 

Indeed, I feel like I talk to a lot of guys out there who invest sub<10M, and seem to use the "I don't market" as a badge of honor. It could also be from a desire to "I'd rather focus on finding undervalued securities" rather than selling your service and building a business.

It is not as simple as you make it out to be.

 

Sub<10M means you are under state regulation.  If you started with a hedge fund structure you could not legally market, it was against the law.  So you are in a catch 22 when you can't start with $15 to $20 million like Alpine did due to its past connections and relationships.  The costs to open an office, hire staff, advertise and focus on retail means you likely won't be profitable until you break $20 million).  Or start a mutual fund and shell out $150k to start and you still need $15 million plus in AUM to break even (that number has come down in recent years it used to be closer to $40 million).    In addition you are for the most part restricted to base management fees and have a lot more business risk as well as administrative and business headaches.

 

Or you can start as a one man shop, possibly working out of your house, run a fund with performance fees where  your time and energy are on gaining returns and trying to build contacts.  Your start up costs are lower.  Your chance of making a living is higher.  Your chance of better investment performance is higher.    You just have to learn to accept the sneers that you manage less than 10 million.   

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Just out of curiosity, and admittedly I know very little about the regulations pertaining to starting a hedge fund, is the Buffett Berkshire approach viable. I.e a hedge fund starts with seed capital in the <10 mil range and eventually buys a relatively small, undervalued publicly traded company and uses that as the investment vehicle.

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Just out of curiosity, and admittedly I know very little about the regulations pertaining to starting a hedge fund, is the Buffett Berkshire approach viable. I.e a hedge fund starts with seed capital in the <10 mil range and eventually buys a relatively small, undervalued publicly traded company and uses that as the investment vehicle.

 

It is viable; however, a public company, other than a insurance company, is usually a poor vehicle for buying stocks due to taxes. I don't know what the laws were in the 1950's, but most of Buffett's early clients would be ineligible to be assessed performance fees under today's rules.

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Jurgis,

 

Thanks for your comments:

 

With my +10 on your post, I'll quibble a bit with this.

 

Of your 3 points, I agree mostly that they are good caveats, thank you... on the first, for me at least, I came from a poor background, and of my original clients, they were almost all friends (I have a big family, but most were not interested in mixing money and family) <30 years of age, and none of them came from money.  However, I was an engineer by training, so I did have the advantage of knowing a lot of folks with good incomes, even if they were young, so it certainly helped.

 

Also, I think you made a great point about being at least somewhat outgoing... I guess I would describe myself as social, but not really outgoing.  That said, when I use the words marketing and promotion, I meant that in the way of an investor actively seeking new clients as a focus (in the article, the fund had a handful of employees and two were dedicated to raising funds... this to me is marketing / promotion).  I definitely think (and again, to me this is obvious, but perhaps to others it's not) if you are managing a small amount of capital, you should be explaining what you do, how you do, and how you think about investing to every single person you can as the opportunity arises.  To me this isn't promotion, it is just sharing your passion when appropriate.

 

I agree if you can't talk with friends / strangers about your passion, it would be hard to raise money.  However, for me, I feel that if you can't talk about your passion to people, you probably aren't "introverted" (or whatever the word is), you probably just haven't found your passion yet... perhaps not being very introverted, this is an unfair statement for me to make.

 

Race,

 

Glad you are doing well on your goal.  You are moving faster than I did, good work!

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