By Bill Kelly, CEO, CAIA Association
WWJD has been a motto for certain holy rollers who ask, ‘What Would Jesus Do?’ in any variety of situations. Perhaps this phrase is meant to serve as an ethical guide or a touchstone back to someone who might just know what is right more than you do. This column leans agnostic, but perhaps the central bankers want to hashtag this and get it trending because it is going to take a water-to-wine moment to figure out how they will ever extricate themselves from the capital markets.
On the subject of these same capital markets and miracles, we will turn Jesus into Jones, as in Alfred Winslow Jones (now AWJ), and wonder What Would Jones Do (or say) about our current state of affairs. By most accounts, AWJ was the founder of an asset class that so many now love to hate, having launched the world’s first hedge fund in 1949. The irony that he was a reporter and editor at Fortune Magazine just prior to this launch should not be lost on any of us who often feel that the modern-day journalists do not always get their alternative facts straight.
AWJ left this world many years ago at the ripe old age of 88 but his legacy, track record, and journalistic leanings provide many clues as to what he was looking to accomplish and how he might react to the 2019 version of the hedge fund space. The Capital Advisory Group at JP Morgan recently put out a report that examined some of the recent hedge fund trends as determined by 227 surveyed investors from around the world. There are a lot of very good data and charts, but our focus here will be on the reported reasons why investors turn to hedge funds in the first place. Not surprisingly, the answers are very different across investor type and a certain kind of AWJ reality seems to be highly correlated to the sophistication of the types of investor groups defined in the survey.
AWJ had a very simple approach to this new way of investing: minimize the risk of a long-only equity portfolio. There was no notion of a CAPM, alpha, beta, or VIX back then, rather, he measured “relative velocity” instead of standard deviation and applied small amounts of leverage. He quite simply was looking to dampen down overall volatility, limit his exposure to catastrophic drawdown risk, and ultimately provide for better risk adjusted returns over the long run. It appears that some of the JP Morgan respondents did not read his obituary or fully understand his investment thesis. Over 50% of the bank platforms, family offices, fund of funds, and insurance companies cite the very rare and elusive “alpha generation” as the top reason for investing in hedge funds. The more sophisticated pension plans heavily lean toward the benefit of “portfolio diversification,” with less than one third of this cohort indicating alpha as a top reason to invest in hedge funds. Alpha generation is not synonymous with absolute return. Habits, related fund flows, and overall sentiment however seem to indicate that it is 100% of the upside capture and no drawdown risk that are the hallmarks of the fantasy land where too many investors reside.
It was Ben Franklin who said nothing in this world can be certain except for death and taxes. Absolute returns will never make that cut, but it is quite likely that Ben would have given his Benjamins to AWJ, after all he was the founder of the lightning rod and knew a thing or two about risk himself. A final piece to this puzzle is a somewhat dated but relevant Perspective about the myths and realities of absolute returns and positive alpha from our friends at the CFA Institute. AWJ would have liked this view.
In the final analysis, it is not about keeping up with the Joneses or any other WWJD derivative. Make WSYD your investment credo…What Should You Do? It is all about you, your informed consent, your risk tolerance, and an enlightened but realistic approach to your own investment plan. Put that on your wrist and wear it well.
Seek diversification, education and know your risk tolerance. Investing is for the long term.