How does some funds with questionable strategies raise capital from investors

[Denistry]

I recently went for an interview with a quan hedgefund, and to be honest before that I didn't exactly know what a quan hedgefund does as I follow a value investing strategy myself. When the CIO described the fund's strategy to me, it was clear that they were using a momentum strategy and a little bit of mean reversion strategy which seems like technical analysis to me. Perhaps they know something I do not know or it may be because of my lack of experience of the hedge fund industry, but what baffles me is how did they manage to raise 100 million dollars using strategies that seem rather questionable (at least to me). Isn't it common knowledge value investing is likely the only way to have long term success? The fund was started in 2016 with 2 mil and now it has 100 mil, it is open end.

 

And also, the CIO said something that stuck with me, he told me that convictions about the market can and should be changed, but that seems like a contradiction to me. This is not the first time I have met with "investors" like that, people with no basis behind what they are doing and simply follow a strategy because "it seems like a good idea". Last year, I met with a VC that invested in another VC (lets call it VC2) simply because VC2 invested in snapchat before it was successful. Again, this doesn't make sense to me.

 

I am sorry if I sound condescending in the post, I certainly do not mean to do that, I am simply baffled by this issue and tbh a little bit angered by these people. I just want to know the opinions of other value investors.

[Lakesider]

Isn't it common knowledge value investing is likely the only way to have long term success?

 

Nope, there are many routes to success.

 

VC1 appears to have assessed a manager on a track record? How else are you going to value a manager?

 

Sometimes momentum investors are buying stocks that look good in the hopes they turn out to be good. Value investors buy stocks that look shit with hopes they turn out to be not so shit. There is often a good reason why stocks have good momentum, eg a high quality moat.

 

 

[Denistry]

Isn't it common knowledge value investing is likely the only way to have long term success?

 

Nope, there are many routes to success.

 

VC1 appears to have assessed a manager on a track record? How else are you going to value a manager?

 

Sometimes momentum investors are buying stocks that look good in the hopes they turn out to be good. Value investors buy stocks that look shit with hopes they turn out to be not so shit. There is often a good reason why stocks have good momentum, eg a high quality moat.

 

 

 

Hi Lakesider, thanks for the reply.

You brought up some good points. I did not ask VC1 any further about what other due diligence he did and it was indeed my mistake for jumping to conclusion. Perhaps he did analyse the management, just that the way that he said it made me think that snapchat was the only reason he jumped in.

 

For the quan hedgefund, I asked them and their average holding period is around 2 weeks, at most 1 month, so it couldn't be that they are looking for companies with economic moat. Also, their mean reversion strategy is simply to buy when an asset had a sudden drop in value, perhaps there are a few things that they did not disclose but I don't think the premise would change much.

 

With regards to the different routes to success, I had some exposure to technical analysis but it didn't work out well for me, I find that value investing is a much better approach. Perhaps you can share with me some of your insights to investing strategies that worked other than value investing? I do recognise that some quan hedgefunds have done well in the long term, eg renaissance technologies, but its pretty much a black box and nobody knows how they do it, so I am genuinely curious about it.

[Gregmal]

I can simplify it for you in a way that many here might not like. Anyone managing more then a maybe low 8 figures is a salesman or employs one. Whatever strategy will raise assets is what they sell you. They get rich not by trouncing the market but by charging fees, and by the time you get tired of the pitch they've acquired their pound of flesh.

[Denistry]

I can simplify it for you in a way that many here might not like. Anyone managing more then a maybe low 8 figures is a salesman or employs one. Whatever strategy will raise assets is what they sell you. They get rich not by trouncing the market but by charging fees, and by the time you get tired of the pitch they've acquired their pound of flesh.

 

Hi Gregmal, thanks for the reply.

I agree with you to a great extent, what I gathered from the quan fund is that they use their backtest results from 2008 to 2016 to convince investors that their strategy work. At least from what is posted on their website, below the website there is a small fineprint that says *actual results is from 2016 onwards, but you really have to try hard to look for it. I am from a statistical background in college and that doesn't seem quite right to me on several levels. First off, its obvious that its been a bull market from the end of 2008 until 2016, so they are using biased data. Second, this few months when the market is down, the fund has posted returns that are seriously quite bad. I think last month the actual returns was -9% or something along those lines. I don't know, but that doesn't look like investing to me, it seems more like gambling.

 

What I find puzzling is why would institutional investors who are supposed to be smart money, which I would assume to know better than the average Joe, invest so much money in them. Perhaps its really like what you said, they are good salesman.

 

I am sorry if I offended anyone, these are my honest thoughts on the issue, at least to the extent of my current understanding.

[LC]

Using data from 08-16 is not totally biased. 08-09 was a huge stressed timeframe. The data there will reflect that. Same with areas of 2010/12. Additionally if they are using global data, other countries have experienced stress during this timeframe.

 

There is a sales pitch behind tons of things. Value managers are pitching their funds - the majority of whom underperform. Being a value investor does not guarantee outperformance. Being a quant investor does not guarantee underperformance.

 

 

[Denistry]

Using data from 08-16 is not totally biased. 08-09 was a huge stressed timeframe. The data there will reflect that. Same with areas of 2010/12. Additionally if they are using global data, other countries have experienced stress during this timeframe.

 

There is a sales pitch behind tons of things. Value managers are pitching their funds - the majority of whom underperform. Being a value investor does not guarantee outperformance. Being a quant investor does not guarantee underperformance.

 

 

 

Hi LC, thanks for the reply.

Fair point regarding the data, I think there was too much generalization with my assertion. I think they were using global data.

I agree that being a value investor does not guarantee outperformance and vice versa, but do you agree that in the long run, value investing would very likely pose better performance than a quan strategy?

 

I think that maybe I phrase my question to vaguely, or I typed too quickly and it came out wrong. So let me rephrase my question:

1. why do institutional investors opt for investing strategies that are less unconventional (and perhaps even speculative) when there are better and more well-established strategies out there such as index investing and value investing.

 

2. Is the size of the AUM a function of a fund manager's investing skills/ strategy, or sales pitch. Generally speaking.

[wachtwoord]

To question 1: because it sells less well? Normal people don't want to be in stocks that go from shit to slightly less shit, they don't want to lose money when everyone else (the market) is going up but are more okay with it when everyone else is losing as well etc etc.

[SHDL]

1. why do institutional investors opt for investing strategies that are less unconventional (and perhaps even speculative) when there are better and more well-established strategies out there such as index investing and value investing.

 

My sense is that some of these institutional investors just love diversification so much that they will happily put a portion of their funds in almost anything as long as its returns are expected to be uncorrelated with what they already have in their portfolios.

 

More generally I think it’s a good sign that you are asking these questions. It is IMO worth spending some time studying the behavior of these investors, as they tend to be big suppliers of market inefficiencies that good and nimble value investors can profitably exploit.

[Hielko]

I recently went for an interview with a quan hedgefund, and to be honest before that I didn't exactly know what a quan hedgefund does as I follow a value investing strategy myself. When the CIO described the fund's strategy to me, it was clear that they were using a momentum strategy and a little bit of mean reversion strategy which seems like technical analysis to me. Perhaps they know something I do not know or it may be because of my lack of experience of the hedge fund industry, but what baffles me is how did they manage to raise 100 million dollars using strategies that seem rather questionable (at least to me). Isn't it common knowledge value investing is likely the only way to have long term success? The fund was started in 2016 with 2 mil and now it has 100 mil, it is open end.

 

And also, the CIO said something that stuck with me, he told me that convictions about the market can and should be changed, but that seems like a contradiction to me. This is not the first time I have met with "investors" like that, people with no basis behind what they are doing and simply follow a strategy because "it seems like a good idea". Last year, I met with a VC that invested in another VC (lets call it VC2) simply because VC2 invested in snapchat before it was successful. Again, this doesn't make sense to me.

 

I am sorry if I sound condescending in the post, I certainly do not mean to do that, I am simply baffled by this issue and tbh a little bit angered by these people. I just want to know the opinions of other value investors.

People sell what people want to buy. So yes, a lot of crap is being sold.

 

That said, there is more than one way that leads to Rome. Your view that value investing is the only way to for long-term success is extremely narrow minded and simplistic.

 

1. Some of the funds with the best long-term track records are actually quant (and yes, that has a T at the end...) hedge funds. See for example https://en.wikipedia.org/wiki/Renaissance_Technologies

2. Furthermore, value investing itself could be considered a quant strategy; you buy stocks that are statistically cheap based on measures such as P/E, P/B (or something more complicated...)

3. There is tons of academic research that indicates that exposure to a momentum factors generates excess return, just like exposure to a value factor (or at least used to in the past). Maybe momentum and value investing are really two sides of the same coin that both exploit the same behavior biases that cause mispricings in markets.

4. Also, don't you think that a lot of value investors aren't exactly doing what you accuse other investors of doing: "people with no basis behind what they are doing and simply follow a strategy because "it seems like a good idea""? Most value investors read some stuff online or a book and decide to follow some simple strategy... (named value investing...)

[Denistry]

I recently went for an interview with a quan hedgefund, and to be honest before that I didn't exactly know what a quan hedgefund does as I follow a value investing strategy myself. When the CIO described the fund's strategy to me, it was clear that they were using a momentum strategy and a little bit of mean reversion strategy which seems like technical analysis to me. Perhaps they know something I do not know or it may be because of my lack of experience of the hedge fund industry, but what baffles me is how did they manage to raise 100 million dollars using strategies that seem rather questionable (at least to me). Isn't it common knowledge value investing is likely the only way to have long term success? The fund was started in 2016 with 2 mil and now it has 100 mil, it is open end.

 

And also, the CIO said something that stuck with me, he told me that convictions about the market can and should be changed, but that seems like a contradiction to me. This is not the first time I have met with "investors" like that, people with no basis behind what they are doing and simply follow a strategy because "it seems like a good idea". Last year, I met with a VC that invested in another VC (lets call it VC2) simply because VC2 invested in snapchat before it was successful. Again, this doesn't make sense to me.

 

I am sorry if I sound condescending in the post, I certainly do not mean to do that, I am simply baffled by this issue and tbh a little bit angered by these people. I just want to know the opinions of other value investors.

People sell what people want to buy. So yes, a lot of crap is being sold.

 

That said, there is more than one way that leads to Rome. Your view that value investing is the only way to for long-term success is extremely narrow minded and simplistic.

 

1. Some of the funds with the best long-term track records are actually quant (and yes, that has a T at the end...) hedge funds. See for example https://en.wikipedia.org/wiki/Renaissance_Technologies

2. Furthermore, value investing itself could be considered a quant strategy; you buy stocks that are statistically cheap based on measures such as P/E, P/B (or something more complicated...)

3. There is tons of academic research that indicates that exposure to a momentum factors generates excess return, just like exposure to a value factor (or at least used to in the past). Maybe momentum and value investing are really two sides of the same coin that both exploit the same behavior biases that cause mispricings in markets.

4. Also, don't you think that a lot of value investors aren't exactly doing what you accuse other investors of doing: "people with no basis behind what they are doing and simply follow a strategy because "it seems like a good idea""? Most value investors read some stuff online or a book and decide to follow some simple strategy... (named value investing...)

 

Hi Hieklo, thanks for the reply

 

1. I think you misunderstood my question. Yes, I agree that quant could work and I also quoted Renaissance tech in my replies below. I think I phrased my question wrongly in the beginning so its my bad. It is simply an opinion on my part that I think that the strategy that the particular hedgefund I was referring too seems questionable, I am not saying that it definitely can't work. I am saying that it seems to me that it can't work, I am not dealing with absolutes. I am not sure if I am phrasing it right, but I hope you get what i mean.

 

2. Yes I am actually using some of that myself, but the fund that I was referring to employs none of that.

 

3. This I am unaware of, while I am aware of the market anomaly dealing with momentum stocks, I have yet to read academic papers on that, will you be willing to share the link with me?

 

4. Again, yea I think I wasn't thinking through when I said that. Perhaps their strategy is much more sophisticated than what I initially thought, and while I wasn't accusing them, I certainly shouldn't had said that at all so its my bad on that as well.

 

haha at least now I know that its spelt as quant and not quan. Thanks for pointing that out, I appreciate it.

[LongHaul]

Dentistry,

 

I give your credit for challenging these funds.  And I think your nose for BS is probably above average. 

Investing is filled with BS and nonsense and garbage.  The ability to sort thru it is critical.  Investors who have high IQ's, are articulate, etc may be completely irrational.  Probably at least 80% are.  It still amazes me sometimes at the extent of the irrationality. 

 

2 Quick stories.

 

I looked at a hedgefund back ~2000 and for the life of me I could not understand this complicated options hedging strategy that got good returns and low volatility.  I just didn't get it and if I don't understand something I pass.  It turned out to be a fraud investors had sunk over $100m in.  And btw the portfolio manager seemed like a mild mannered professor.

 

Around 1999-2000 I looked at a high flying company's annuals multiple times.  I could not figure out how they made money or what they were doing.  Super complicated.  The market cap went to ~$60 billion at one point and it kept going up and up.  It turned out to be Enron. 

 

If something doesn't make sense to me I just pass.  Never assume others have done the work because I lot of the time they haven't.  Ge was recently similar.

 

There are many ways to failure also.  I think from a long run odds perspective value investing is the way to go inclusive of risk.

 

 

 

[Denistry]

I recently went for an interview with a quan hedgefund, and to be honest before that I didn't exactly know what a quan hedgefund does as I follow a value investing strategy myself. When the CIO described the fund's strategy to me, it was clear that they were using a momentum strategy and a little bit of mean reversion strategy which seems like technical analysis to me. Perhaps they know something I do not know or it may be because of my lack of experience of the hedge fund industry, but what baffles me is how did they manage to raise 100 million dollars using strategies that seem rather questionable (at least to me). Isn't it common knowledge value investing is likely the only way to have long term success? The fund was started in 2016 with 2 mil and now it has 100 mil, it is open end.

 

And also, the CIO said something that stuck with me, he told me that convictions about the market can and should be changed, but that seems like a contradiction to me. This is not the first time I have met with "investors" like that, people with no basis behind what they are doing and simply follow a strategy because "it seems like a good idea". Last year, I met with a VC that invested in another VC (lets call it VC2) simply because VC2 invested in snapchat before it was successful. Again, this doesn't make sense to me.

 

I am sorry if I sound condescending in the post, I certainly do not mean to do that, I am simply baffled by this issue and tbh a little bit angered by these people. I just want to know the opinions of other value investors.

People sell what people want to buy. So yes, a lot of crap is being sold.

 

That said, there is more than one way that leads to Rome. Your view that value investing is the only way to for long-term success is extremely narrow minded and simplistic.

 

1. Some of the funds with the best long-term track records are actually quant (and yes, that has a T at the end...) hedge funds. See for example https://en.wikipedia.org/wiki/Renaissance_Technologies

2. Furthermore, value investing itself could be considered a quant strategy; you buy stocks that are statistically cheap based on measures such as P/E, P/B (or something more complicated...)

3. There is tons of academic research that indicates that exposure to a momentum factors generates excess return, just like exposure to a value factor (or at least used to in the past). Maybe momentum and value investing are really two sides of the same coin that both exploit the same behavior biases that cause mispricings in markets.

4. Also, don't you think that a lot of value investors aren't exactly doing what you accuse other investors of doing: "people with no basis behind what they are doing and simply follow a strategy because "it seems like a good idea""? Most value investors read some stuff online or a book and decide to follow some simple strategy... (named value investing...)

 

Sorry, my laptop was almost out of battery just now so I had to reply quickly and I missed out some stuff that I wanted to say on top of that.

 

While a lot of your points are valid, I don't really agree with one. I don't think that it is narrow-minded to believe that only 1 strategy work. I can only speak for myself but I had tried technical analysis before, and I concluded that it doesn't work well so I jumped to value investing, and it hasn't failed me. At least not yet, it may fail me in the future, but as of now my belief is that value works, and there is academic studies, and my personal anecdotal story to prove that. It doesn't mean that I discredit every other form of investing, but I certainly do believe that my form of investing is superior to theirs, if not I will just switch to their form of investing.

 

I am certainly not trying to make anyone look bad by saying this, but I think that I have to put my POV out that as well. Thanks for reading.

[Gregmal]

1. why do institutional investors opt for investing strategies that are less unconventional (and perhaps even speculative) when there are better and more well-established strategies out there such as index investing and value investing.

 

My sense is that some of these institutional investors just love diversification so much that they will happily put a portion of their funds in almost anything as long as its returns are expected to be uncorrelated with what they already have in their portfolios.

 

More generally I think it’s a good sign that you are asking these questions. It is IMO worth spending some time studying the behavior of these investors, as they tend to be big suppliers of market inefficiencies that good and nimble value investors can profitably exploit.

 

This is kind of what I've been told too. That's why, as great as Jim Chanos may be, institutional managers just relentlessly throw money at him so they can call themselves long/short...

[Denistry]

Dentistry,

 

I give your credit for challenging these funds.  And I think your nose for BS is probably above average. 

Investing is filled with BS and nonsense and garbage.  The ability to sort thru it is critical.  Investors who have high IQ's, are articulate, etc may be completely irrational.  Probably at least 80% are.  It still amazes me sometimes at the extent of the irrationality. 

 

2 Quick stories.

 

I looked at a hedgefund back ~2000 and for the life of me I could not understand this complicated options hedging strategy that got good returns and low volatility.  I just didn't get it and if I don't understand something I pass.  It turned out to be a fraud investors had sunk over $100m in.  And btw the portfolio manager seemed like a mild mannered professor.

 

Around 1999-2000 I looked at a high flying company's annuals multiple times.  I could not figure out how they made money or what they were doing.  Super complicated.  The market cap went to ~$60 billion at one point and it kept going up and up.  It turned out to be Enron. 

 

If something doesn't make sense to me I just pass.  Never assume others have done the work because I lot of the time they haven't.  Ge was recently similar.

 

There are many ways to failure also.  I think from a long run odds perspective value investing is the way to go inclusive of risk.

 

Haha thanks for the reply LongHaul, appreciate it.

 

I do hope that my nose for BS is above average as well. Yea, one of the things that I would really want to figure out is whether the AUM  of a fund is a function of good sales tactic or investing skills, because if it is the former, that would certainly explain the irrationality in the market.

 

I think that value investing makes a lot of sense intuitively, but not so much for a lot of strategies out there which might sound cool but does nothing. But again, I made the mistake of channeling in too many emotions when I was writing the post.

 

Speaking of which, do you know about the capital deployment process for institutional investors? How do they look for potential investment funds to allocate their capital and stuff like that?

[Denistry]

1. why do institutional investors opt for investing strategies that are less unconventional (and perhaps even speculative) when there are better and more well-established strategies out there such as index investing and value investing.

 

My sense is that some of these institutional investors just love diversification so much that they will happily put a portion of their funds in almost anything as long as its returns are expected to be uncorrelated with what they already have in their portfolios.

 

More generally I think it’s a good sign that you are asking these questions. It is IMO worth spending some time studying the behavior of these investors, as they tend to be big suppliers of market inefficiencies that good and nimble value investors can profitably exploit.

 

This is kind of what I've been told too. That's why, as great as Jim Chanos may be, institutional managers just relentlessly throw money at him so they can call themselves long/short...

 

Hi Greg, thanks for the reply

I have got a question. So are you sayin that instituitional investors do not really have a defined plan on how they deploy capital? Like, they don't care about the quality of the investment funds they are investing in, and only care about the generalised strategy that the fund is using?

[LongHaul]

Dentistry,

 

I give your credit for challenging these funds.  And I think your nose for BS is probably above average. 

Investing is filled with BS and nonsense and garbage.  The ability to sort thru it is critical.  Investors who have high IQ's, are articulate, etc may be completely irrational.  Probably at least 80% are.  It still amazes me sometimes at the extent of the irrationality. 

 

2 Quick stories.

 

I looked at a hedgefund back ~2000 and for the life of me I could not understand this complicated options hedging strategy that got good returns and low volatility.  I just didn't get it and if I don't understand something I pass.  It turned out to be a fraud investors had sunk over $100m in.  And btw the portfolio manager seemed like a mild mannered professor.

 

Around 1999-2000 I looked at a high flying company's annuals multiple times.  I could not figure out how they made money or what they were doing.  Super complicated.  The market cap went to ~$60 billion at one point and it kept going up and up.  It turned out to be Enron. 

 

If something doesn't make sense to me I just pass.  Never assume others have done the work because I lot of the time they haven't.  Ge was recently similar.

 

There are many ways to failure also.  I think from a long run odds perspective value investing is the way to go inclusive of risk.

 

Haha thanks for the reply LongHaul, appreciate it.

 

I do hope that my nose for BS is above average as well. Yea, one of the things that I would really want to figure out is whether the AUM  of a fund is a function of good sales tactic or investing skills, because if it is the former, that would certainly explain the irrationality in the market.

 

I think that value investing makes a lot of sense intuitively, but not so much for a lot of strategies out there which might sound cool but does nothing. But again, I made the mistake of channeling in too many emotions when I was writing the post.

 

Speaking of which, do you know about the capital deployment process for institutional investors? How do they look for potential investment funds to allocate their capital and stuff like that?

 

As far as skill and AUM I think it is a mix. Buffett, Klarman and Tepper and all incredible investors with big AUM but I have seen lot of big funds that were riding a wave.  It is really case by case I think.  The AUM can be an authority bias or headfake at times. 

 

I have no clue how institutions allocate - I am no expert there.  I have heard of a study though that found that when institutions pulled out of funds that underperformed for 2-3 years the funds subsequently outperformed.

My impression is that institutions and high net worth are no more rational than retail investors generally.  They just mindlessly follow the herd with little independent research or thought.

[Denistry]

Dentistry,

 

I give your credit for challenging these funds.  And I think your nose for BS is probably above average. 

Investing is filled with BS and nonsense and garbage.  The ability to sort thru it is critical.  Investors who have high IQ's, are articulate, etc may be completely irrational.  Probably at least 80% are.  It still amazes me sometimes at the extent of the irrationality. 

 

2 Quick stories.

 

I looked at a hedgefund back ~2000 and for the life of me I could not understand this complicated options hedging strategy that got good returns and low volatility.  I just didn't get it and if I don't understand something I pass.  It turned out to be a fraud investors had sunk over $100m in.  And btw the portfolio manager seemed like a mild mannered professor.

 

Around 1999-2000 I looked at a high flying company's annuals multiple times.  I could not figure out how they made money or what they were doing.  Super complicated.  The market cap went to ~$60 billion at one point and it kept going up and up.  It turned out to be Enron. 

 

If something doesn't make sense to me I just pass.  Never assume others have done the work because I lot of the time they haven't.  Ge was recently similar.

 

There are many ways to failure also.  I think from a long run odds perspective value investing is the way to go inclusive of risk.

 

Haha thanks for the reply LongHaul, appreciate it.

 

I do hope that my nose for BS is above average as well. Yea, one of the things that I would really want to figure out is whether the AUM  of a fund is a function of good sales tactic or investing skills, because if it is the former, that would certainly explain the irrationality in the market.

 

I think that value investing makes a lot of sense intuitively, but not so much for a lot of strategies out there which might sound cool but does nothing. But again, I made the mistake of channeling in too many emotions when I was writing the post.

 

Speaking of which, do you know about the capital deployment process for institutional investors? How do they look for potential investment funds to allocate their capital and stuff like that?

 

As far as skill and AUM I think it is a mix. Buffett, Klarman and Tepper and all incredible investors with big AUM but I have seen lot of big funds that were riding a wave.  It is really case by case I think.  The AUM can be an authority bias or headfake at times. 

 

I have no clue how institutions allocate - I am no expert there.  I have heard of a study though that found that when institutions pulled out of funds that underperformed for 2-3 years the funds subsequently outperformed.

My impression is that institutions and high net worth are no more rational than retail investors generally.  They just mindlessly follow the herd with little independent research or thought.

 

Now that you mention it, long term capital management does come to mind. And I heard that a few institutions pulled out of bill ackman's fund when it was tanking, but now the fund is doing really well. I wonder if the same thing is going to happen with david einhorn's fund. Can you share the link of the study if you have it? if not its fine. Thanks

[Hielko]

I recently went for an interview with a quan hedgefund, and to be honest before that I didn't exactly know what a quan hedgefund does as I follow a value investing strategy myself. When the CIO described the fund's strategy to me, it was clear that they were using a momentum strategy and a little bit of mean reversion strategy which seems like technical analysis to me. Perhaps they know something I do not know or it may be because of my lack of experience of the hedge fund industry, but what baffles me is how did they manage to raise 100 million dollars using strategies that seem rather questionable (at least to me). Isn't it common knowledge value investing is likely the only way to have long term success? The fund was started in 2016 with 2 mil and now it has 100 mil, it is open end.

 

And also, the CIO said something that stuck with me, he told me that convictions about the market can and should be changed, but that seems like a contradiction to me. This is not the first time I have met with "investors" like that, people with no basis behind what they are doing and simply follow a strategy because "it seems like a good idea". Last year, I met with a VC that invested in another VC (lets call it VC2) simply because VC2 invested in snapchat before it was successful. Again, this doesn't make sense to me.

 

I am sorry if I sound condescending in the post, I certainly do not mean to do that, I am simply baffled by this issue and tbh a little bit angered by these people. I just want to know the opinions of other value investors.

People sell what people want to buy. So yes, a lot of crap is being sold.

 

That said, there is more than one way that leads to Rome. Your view that value investing is the only way to for long-term success is extremely narrow minded and simplistic.

 

1. Some of the funds with the best long-term track records are actually quant (and yes, that has a T at the end...) hedge funds. See for example https://en.wikipedia.org/wiki/Renaissance_Technologies

2. Furthermore, value investing itself could be considered a quant strategy; you buy stocks that are statistically cheap based on measures such as P/E, P/B (or something more complicated...)

3. There is tons of academic research that indicates that exposure to a momentum factors generates excess return, just like exposure to a value factor (or at least used to in the past). Maybe momentum and value investing are really two sides of the same coin that both exploit the same behavior biases that cause mispricings in markets.

4. Also, don't you think that a lot of value investors aren't exactly doing what you accuse other investors of doing: "people with no basis behind what they are doing and simply follow a strategy because "it seems like a good idea""? Most value investors read some stuff online or a book and decide to follow some simple strategy... (named value investing...)

 

Sorry, my laptop was almost out of battery just now so I had to reply quickly and I missed out some stuff that I wanted to say on top of that.

 

While a lot of your points are valid, I don't really agree with one. I don't think that it is narrow-minded to believe that only 1 strategy work. I can only speak for myself but I had tried technical analysis before, and I concluded that it doesn't work well so I jumped to value investing, and it hasn't failed me. At least not yet, it may fail me in the future, but as of now my belief is that value works, and there is academic studies, and my personal anecdotal story to prove that. It doesn't mean that I discredit every other form of investing, but I certainly do believe that my form of investing is superior to theirs, if not I will just switch to their form of investing.

 

I am certainly not trying to make anyone look bad by saying this, but I think that I have to put my POV out that as well. Thanks for reading.

So, you tried technical analysis and it didn't work and now you are trying value investing and you are sure it's not only working, but the only strategy that works? wow...

[Gregmal]

1. why do institutional investors opt for investing strategies that are less unconventional (and perhaps even speculative) when there are better and more well-established strategies out there such as index investing and value investing.

 

My sense is that some of these institutional investors just love diversification so much that they will happily put a portion of their funds in almost anything as long as its returns are expected to be uncorrelated with what they already have in their portfolios.

 

More generally I think it’s a good sign that you are asking these questions. It is IMO worth spending some time studying the behavior of these investors, as they tend to be big suppliers of market inefficiencies that good and nimble value investors can profitably exploit.

 

This is kind of what I've been told too. That's why, as great as Jim Chanos may be, institutional managers just relentlessly throw money at him so they can call themselves long/short...

 

Hi Greg, thanks for the reply

I have got a question. So are you sayin that instituitional investors do not really have a defined plan on how they deploy capital? Like, they don't care about the quality of the investment funds they are investing in, and only care about the generalised strategy that the fund is using?

 

It's not a one size fits all answer but the crux of a lot of them now, simply because of how easy it is to raise obscene amounts of money, is definitely more skewed toward finding something marketable. I've heard a bunch how despite Chanos's numbers actually being quite poor(IIRC someone said he's lost about 4% a year on average since the early 1990's) he continually gets allocations from funds because it allows them to claim they have a diversified or long/short strategy. That alone probably raises millions despite these people knowing if history repeats, they're allocating money to a losing venture.

[SHDL]

What Greg said above, plus, if you want to know more, the big public pension funds (like Calpers and such) generally have websites where they disclose quite a lot about their operations.  Not confidence inspiring material (if you care about public finance), but you will probably find some insights along with nuggets of comedy gold. 

[Guest Schwab711]

I recently went for an interview with a quan hedgefund, and to be honest before that I didn't exactly know what a quan hedgefund does as I follow a value investing strategy myself. When the CIO described the fund's strategy to me, it was clear that they were using a momentum strategy and a little bit of mean reversion strategy which seems like technical analysis to me. Perhaps they know something I do not know or it may be because of my lack of experience of the hedge fund industry, but what baffles me is how did they manage to raise 100 million dollars using strategies that seem rather questionable (at least to me). Isn't it common knowledge value investing is likely the only way to have long term success? The fund was started in 2016 with 2 mil and now it has 100 mil, it is open end.

 

And also, the CIO said something that stuck with me, he told me that convictions about the market can and should be changed, but that seems like a contradiction to me. This is not the first time I have met with "investors" like that, people with no basis behind what they are doing and simply follow a strategy because "it seems like a good idea". Last year, I met with a VC that invested in another VC (lets call it VC2) simply because VC2 invested in snapchat before it was successful. Again, this doesn't make sense to me.

 

I am sorry if I sound condescending in the post, I certainly do not mean to do that, I am simply baffled by this issue and tbh a little bit angered by these people. I just want to know the opinions of other value investors.

 

Mean reversion on short-term demand for a security (technical analysis, or whatever else) is the same strategy as 'deep value' investing. The former hopes to experience reversion through increased trials. The latter is making up for fewer trials by allowing each trial more time to revert or not (which is essentially more trials of the same underlying). These aren't precisely correct descriptions but in simple language they're using the same statistical concept. That's why institutional investors allocate to quants. Quants have a scalable version of Bernoulli's Theorem/Law of Large Numbers.

 

As to the VC investing in a VC example. Maybe it is ridiculous but it could also be that VC thinks VC2 has better deal flow because of its early SNAP investment, which may be conducive to high future returns.

 

Edit: I'm no expert here but momentum probably falls under different concepts. Maybe there's a behavioral economics model that backs up the concept.

[LC]

I think that maybe I phrase my question to vaguely, or I typed too quickly and it came out wrong. So let me rephrase my question:

1. why do institutional investors opt for investing strategies that are less unconventional (and perhaps even speculative) when there are better and more well-established strategies out there such as index investing and value investing.

 

2. Is the size of the AUM a function of a fund manager's investing skills/ strategy, or sales pitch. Generally speaking.

 

For (1) I disagree with grouping value investing and index investing into the same bucket. They are not the same. "Value investing" is a meaningless phrase. It has no standard meaning, it is different to every manager. As Heiko mentioned, a "value" strategy could be statistically defined and implemented in an automated fashion - like a quant strategy. I personally believe Rentech uses value strategies as part of their algorithms.

 

So I am having trouble with this question. Why don't fund managers buy indexes? Some do - see Vanguard etc. Some do not because it would put them out of a job. You say "better and more well-established" - says who? All the baloney that value eventually outperforms XYZ is just marketing. I buy into it - but there are countless billionaires who disagree and their pocketbook trumps mine by a longshot.

 

It's like screaming at the crowd, "If you only did things my way, I would be rich!"

 

For the second question, it's a mix of all. Hell, luck probably plays a role as well. Plenty of great managers with low AUM out there. Plenty of great managers with high AUM out there as well. Same with shitty managers.

 

My problem with fund managers is consistency. Only a handful are great across decades. Even less are accessible to me as an individual investor. And it's difficult (for me, impossible) to pick "the next one" - so I lean heavily on Buffett/BRK while he's around and plan to do the rest myself.

[muscleman]

I recently went for an interview with a quan hedgefund, and to be honest before that I didn't exactly know what a quan hedgefund does as I follow a value investing strategy myself. When the CIO described the fund's strategy to me, it was clear that they were using a momentum strategy and a little bit of mean reversion strategy which seems like technical analysis to me. Perhaps they know something I do not know or it may be because of my lack of experience of the hedge fund industry, but what baffles me is how did they manage to raise 100 million dollars using strategies that seem rather questionable (at least to me). Isn't it common knowledge value investing is likely the only way to have long term success? The fund was started in 2016 with 2 mil and now it has 100 mil, it is open end.

 

And also, the CIO said something that stuck with me, he told me that convictions about the market can and should be changed, but that seems like a contradiction to me. This is not the first time I have met with "investors" like that, people with no basis behind what they are doing and simply follow a strategy because "it seems like a good idea". Last year, I met with a VC that invested in another VC (lets call it VC2) simply because VC2 invested in snapchat before it was successful. Again, this doesn't make sense to me.

 

I am sorry if I sound condescending in the post, I certainly do not mean to do that, I am simply baffled by this issue and tbh a little bit angered by these people. I just want to know the opinions of other value investors.

 

There are many ways to success in this game. The only problem is that none of these methods are easy to be found.....

 

Don't under-estimate pure technical traders. Richard Dennis ran his $400 stake to $100m by purely using technical analysis.

Look at the futures market. I don't believe any fundamentalists can make serious money at all.