State of the Hedge Fund Union Panel: Alpha Hedge West Conference

Next up in our series of notes from the Alpha Hedge West Conference is the State of the Hedge Fund Union with a talk featuring Jason Huemer (Visium), Bruce Richards (Marathon Asset), and Philip Weingord (Seer Capital).

Comments below: JH = Jason Huemer, BR = Bruce Richards, PW = Philip Weingord


State of the Hedge Fund Union 

Investors as shock absorbers.  Most investors want hurdle rate.  Funds haven't had "rogue" trader issues.  Big funds had inflows, small individual funds had outflows.  Cult of personality.

BR> Only need to get past cult of personality if you want to grow after founder passes.  Institutional key to growing.  Marathon manages over $11B in AUM.  Team of partners together over 18 years.  All that history makes for a strong team with collective wisdom.  

JH> Have tried to move from one star.  Investors looking for and want something beyond "one" guy.  Worked for Jamie Dimon and Steve Cohen.  They have 50 risk takers.  They have over $5B in AUM.  No one controls P&L.  5 years ago known only as health care...had to move model to multi-strategy.  It took 5 years of beating market by 1000 bps to convince people.

CH> Agrees with Joseph Brusuelas that we are in a structural break.  Means old trends + stats not reliable.

PW> Fed tightening will equal outflows from bond funds...probably for 2 years.  History says credit spreads normally come in during fed tightening.  Oppys are floating rate...swap fixed rate for floating rate.  Prefers stronger credit vs. High Yield Bonds.

JH> Has created alt mutual fund.  Brick Lake was early proponent of Alt Mutual Funds.  Log jam reason for delay.  So many funds did not want to move down value map... other folks missing tools to move up.  Sub-advisor in a couple mutual funds.  Big funds saw move from fees to like 50 BPS from 110 BPS.  Sees folks moving to multiple manager products and single manager products.  In time, 25% of fees from mutual funds will be Alt Mutual Funds.

BR> How do liquidity needs of Alt Funds impact types of strategies?  For example, can't offer liquidity in/out for say distressed debt funds.  Excited about JOBS Act.

PW> Closed end funds can address some issues of liquidity caused by open end Alt Mutual Funds.

CH> Regulation?

PW> Hedge funds least to blame for financial crisis.  If regulation increases confidence, then it is ok.  Increases some cost and takes time.  Form PF.  Lots of it is silly questions, not know what is meant by some questions.  Not al funds should have same questions.  Overall, ok.

BR> Been registered with SEC over a decade now.  Registered with numerous regulatory bodies.  Would prefer to have one strong regulator.  Look at JPM and recent announcement of hiring like 5,000 employees.  If there were consolidated regulation, it could be better and more efficient.

JH> Regulators have been unfair to hedge funds with high profile and heavy handed tactics.

PW> Market not overreacting to speculation of Bernanke replacement.

BR> If Yellen gets job, she'll be more Bernanke than Bernanke.

Be sure to check out the rest of our summary of the Alpha Hedge West Conference.

Condition of the Consumer & Investor Challenges: Alpha Hedge West Conference

Next up in our series of notes from the Alpha Hedge West Conference is a panel called Condition of the Consumer & Challenges for the Investor as the Economy Expands.  It featured Joseph Brusuelas, Senior Economist at Bloomberg and Kristin Bentz, Executive Director at PMG Venture Group.

Condition of the Consumer & Investor Challenges 

"It is worse than you think"

Economic outlook is historically weak.  Economy is sluggish.  No escape velocity. Output gap of 6%.  For years pattern of unemployment rate similar to employment divided population.  Correlation broke down with recession.  

Low wage bias.  Student loan disbursement up a lot.  Q1 2003 roughly $250B, now almost $1T.  Student debt being used for study of subjects that don't pay much.  

Middle class disappearing.  People moving down to dollar stores from JCP, Sears, Walmart, etc.  Loss is real wages driving trend.  Trading down.  

Economy appears to be getting better, but really, the 1% is driving growth.  Recovery not broad based.  Wealth effect of Fed is benefiting top, but not trickling down.  

Spending has recently moved up in an unsustainable way.  "Layaway is back."  If deleveraging is over, the economy is going to come back.  Actually, deleveraging is coming from housing defaults.  Drivers of capital spending are autos and student debt.  

Lots of underbanked.  Amex & Walmart team up for underbanked ("Bluebird" product).  25% not banked.  Pawn shops thriving.  

Worldwide, US doing ok compared to Europe and Asia.  Asia is struggling.  Weak to poor outlook 12 to 18 months out.  

Yellen likely to replace Bernanke as the first female Fed Chief.  $140B tax hike at start of year.  Budget gap is closing now, but set to spread again in 2018.


Be sure to check out the rest of our summary of the Alpha Hedge West Conference.

Hedge Fund Seeding Panel: Alpha Hedge West Conference

Next up in our series of notes from the Alpha Hedge West Conference is the panel on hedge fund seeding and it featured Rachel Minard (Minard Capital), Jeffrey Cozad (Stonerise Capital), Basil Williams (Mariner Investment Group), and Jonathan Miles (Wilshire Associates).


Hedge Fund Seeding Panel: Alpha Hedge West Conference

RM> Need for infrastructure.  Allows managers to get started.

BW> Incubation model.  Lots of regulatory requirements.  Has changed paradigm.  Take away business risks so manager can focus on investment risks.  Last 12 months 340 teams have applied, 140 made second round, 50 made 3rd round 10 made 4th round and 3 were funded.  After 1 to 18 month period, they will be funded at $100M and Co-Branded.

JC> Seeding experience:  Started with $50M in capital.  $15M from partners and $35M from others.  Different types of seed opportunities.  Some own GP, some just want rev share.  Some come with money others come with marketing.  Types of demands seeds have include Governance.  Buyout.  Keyman, Position Transparency.  Decided to bring in $100M partner.  No single right answer.  Partner remains great partner.

JM> Do you want to invest in a seeded firm or seed a firm?  A $4M dollar manager would need both an investment plan and a business plan.  Investment with seeded firm with $150M is good because of vetting and because seeder is stuck where investor can leave.

BW> Looking for firm with strong investing process.  Strategies need Billion dollar potential.  How marketable are the managers?  Exudes confidence and poise and communicates clearly.

JM> Biggest change in industry is "Institutionalization".

JC> Days of raising $50M to $100M and then going from there is gone.  Seed is no panacea.

RM>Proof is needed now.  Track record not enough.  Now have to show how you got that and have to show it is replicable.

Be sure to check out the rest of our summary of the Alpha Hedge West Conference.

Opportunistic Credit Roundtable: Alpha Hedge West Conference

Next up in our series of notes from the Alpha Hedge West Conference is the Opportunistic Credit Roundtable featuring Emanuel Friedman of EJF Capital, Andrew Springer of Marathon Asset, Ronnie Jaber of Carlyle Group, and Avery Kiser of Neuberger Berman Alternatives.


Opportunistic Credit Roundtable

EF> Banking going through greatest changes since the 1930's.  Financials are being turned into utilities by turning them 100% capital requirements.  

AS> Regulation is creating dislocations in markets.  GSEs responsible for 90% of mortgage originations.

RJ> Direct lending is an area of opportunity.

EF> Change with Fannie and Freddie will be greatest change ever in mortgage market.

Moderator Mark Okada (Highland Capital) > How are people addressing rising rates?

AS> Hard to predict long end of curve.  Focusing on trends less impacted by long end of curve like distressed debt.  Likes credit.  Stay away from duration.

EF> Sees all as regulatory trade. Wants bank or insurance companies to buy it from them.

RJ> Technicals bad on high yield.  Likes floating and credit.  Munis are largely retail driven.  Lots of volatility and lack of strong bid.

Be sure to check out the rest of our summary of the Alpha Hedge West Conference.

The Role of Volatility Panel: Alpha Hedge West Conference

Next up in our series of notes from the Alpha Hedge West Conference is the Role of Volatility with a panel featuring Michael Schmanske of Glenshaw Capital, Christopher Cole of Artemis Capital, Zem Sternberg of Lake Hill Capital, and Joe Reynoso of Reynoso Asset Management.


The Role of Volatility

JC> Volatility is the new asset class.

JR> Used to be that the dumbest guy bought options, now that's not the case.  Options now efficient for hedging.  

ZS> Think of not as an asset class, but as a specialization.

JC> Government is the elephant in the room.

CF> Volatility has normalized.  QE has impacted pricing of tail risk.  Some think Fed can suppress volatility, thinks that is a myth.

JR> Seems like volatility is moving similar among asset classes.  Fed won't let market crash.

CC> Financial repression.

ZS> Brokers & Liquidity providers make money in options, those are the proven models.  Don't ignore the info the options market give, even if you don't trade it.

CC> Key is valuing the expectation of volatility.  Game theory is key.  Life is decay.  The more people short VOL, the more risk for a spike.

ZS> Think of options as insurance.  Move from Newtonian world to quantum mechanics.

Be sure to check out the rest of our summary of the Alpha Hedge West Conference.

Structured Credit Panel at Alpha Hedge West Conference

Next up in our series of notes from the Alpha Hedge West Conference is the panel on structured credit featuring Richard d'Albert (Seer Capital, Christopher Hentemann (400 Capital), Amin Majidi (Premium Point Investments), and Rajesh Agarwal (Napier Park Global Capital).


Structured Credit Panel: Alpha Hedge West Conference

RD> Structured Credit now a sector in its own right for fixed income.  Usually accessed through private equity or co-mingled.

CH> Multi Sector structured finance.  RMBS, CMBS, CLOs, CDOs both US and Non-US.  Hedge fund and PE Style.  Looks for optionality and asymmetric risk.  More top down thematic.

AM> Residential only.  Over $2B in AUM.  Hedge and PE Style.  Fundamental analysis.  Credit risk and prepayment.  Mix of distress and new issue.  Beneficiaries of deleveraging on legacy side.  Before they had tactical investors looking for beaten stocks, now it is more strategic long term institutional investors.

RA> $6B in AUM.  Look at mortgage, Auto and credit card loan level data.  Have had a good run in mortgage.  Crash lead to short opportunity.  '09 and '10 long opportunity, '10, '11, and '12 refi opportunity.  IO's interest only mortgages.  Thinks IOs hedged for duration can be double digit.

DS> Impact of rise in rates?

AM> June was kick off of rate rise.  Rising rates has created opportunity in credit bonds.  Rising rates good for credit bonds at top of structure.  Must do homework.

CH> Markets are cyclical.  Going from low rates to high rates.  Rates will rise.  Will create volatility.  Need volatility sensitive structure.  Want Vega.  Be short duration.  Here you don't have to just shorten duration, can actually go short duration.  Overall tone is positive.  GDP is up.  Housing up.  Credit spreads likely to contract.  Assets that benefit from steeper yield curve.

RD> Banks no longer buyers in space.  Less liquidity, but more opportunity.

AM> New environment very good for improving credit quality in underwriting.  Only like hedge investors can buy.  Rating agencies also very conservative now.  Regulation hurting bank balance sheets.  Opportunity to buy mortgages is sustained.

RA> Not enough capital available for subordinated structure.  Newly issued debt easier to understand.

What keeps you up at night?

AM> Home prices.  Buy protection with out of the money puts.

RA> Affordability stands around 150.  Number was 200.  Further backup in rates will hurt prices.  Lots of cash buyers have been in, giving run up in home prices.  They may not be around going forward.

DS> Private Label MBS

CH> Loans more than $417K for Fannie and Freddie.  Market mostly has been closed.  Over 90% of loans are Fannie and Freddie.  Low home prices have also reduced need for jumbos.

AM> Freddie now releasing loan level data on loan performance.  Great for doing analysis.

Be sure to check out the rest of our summary of the Alpha Hedge West Conference.

Dynamic Investment Panel: Alpha Hedge West Conference

Next up in our series of notes from the Alpha Hedge West Conference is the dynamic investment panel featuring John Claisse of Albourne America, Joy Xu of Verizon Investment Management and Andrew Karsh of CALPERS.

Comments below: JC = John Claisse, JX = Joy Xu and AK = Andrew Karsh


Dynamic Investment Panel: Alpha Hedge West Conference 

MD> Just because you got away with it doesn't mean you didn't take a risk.  Missing 40 worst days more than two times better than getting 40 best days.

JX> Ben Graham said investors need to manage "risk" not "returns".  Risk premium not static.  If you put $1M into market for 20 years each year from '28 to '93, the range of outcomes is between roughly $650K and more than $13M.  Very wide range.  Not losing money is key.  Liquidity is never there when you need it.  Risk premium, not stable, in other words, bonds have frequently outperformed stocks.

AK> $260B in AUM.  Bonds allocated internally.  Real estate and hedge funds managed externally. Goal of 7.5% returns.

JC> Lots of turnover at Board and Trustee level.

SB> Manages about $7B AUM.  Good Harbor Financial.  If they like risk they go equity, don't like risk they go fixed income.  Better to be out of market worst 10 days than in 10 best days.  Is currently 50% stocks and 50% bonds.  Neutral.

JX> They use models or internal management.

AK> Allocates to partners that generates absolute returns vs relative and better dialogue vs normal hedge fund process.

JC> Smaller managers, if they get standard info on active risk taking by global, macro, etc.  They can use that info and insight.

Be sure to check out the rest of our summary of the Alpha Hedge West Conference.

Next Generation of Hedge Fund Managers: Alpha Hedge West Conference

Next up in our series of notes from the Alpha Hedge West Conference is the panel on hedge fund leaders of the future: the next generation.  It featured Michael Sedoy (Kimmeridge Capital), Neal Shah (Valtura Capital), Mike Keough (Racon Capital), John Rende (Copernicus Capital).


The Next Generation of Hedge Fund Managers 

In 2012 roughly 1,200 hedge funds tried to start and only 35 had over $100M in AUM.

JR> At Weintraub he did health care and overlaid technical analysis and options.

MK> What learned, what he'd do now:  Experienced team of people working together.  Underestimated what it meant to create a portfolio from scratch.

Moderator> How about the business side?

MK> Believing you need to have separation between the business side and the investing side.

MS> Has COO.  In terms of 3rd parties, has only gold plated servicers.

Moderator>24 of the 35 funds had seed deals.  1.5% and 15% for founder deals.

JR>The founders class is 1% and 15% up to $75M.

MK> Feels good about the economy.  Feels next Fed chair will dictate monetary policy for US and World.  Likes short volatility and most carry strategies.  Higher rates off the table with Summers gone.

NS> Likes some Puerto Rico Munis.  Small Market Munis blowing up.

MK> VIX is 4 points over normal historical trend.

MS> Shale.  People were doing well during rise in energy prices.  Last three years has been becoming about finding high margin energy.  North American unconcentrated.

NS> Events they look for are panic.  Credit Stress, BK, Spins, Div Cuts, etc.  Prefers not to be activist.  95% of the time, mgmt is reasonable.  5% of the time, fixed agent is running cargo for itself.  

JR> Old fund had Vol of half the S&P.  This new fund will have more.  Will use lots of similar tactics.

MK> Weak portfolio that recognizes different asset classes react to volatility.  In May he was long copper and short Aussie dollar and Chile Peso.  Really likes airline stocks.

What Keeps You Up At Night?

JR> Time horizon different between the investor and fund manager.

MK> Difference between correlation and causality.

NS> Amount of money chasing corporate credit.

Other Comments

NS> Smaller funds can buy cheaper muni issues discounted in Puerto Rico compared to what others would be in bigger funds.

JR> Need to have people feel empowered.  Need to have decision capabilities.

Moderator> What is Emerging Manager?  Spinoff or Spinout?  $1B to $2B in AUM?  Minority Owned?

Be sure to check out the rest of our summary of the Alpha Hedge West Conference.

Where Is Venture Capital Investing Now & Why? Alpha Hedge West Conference

Next up in our series of notes from the Alpha Hedge West Conference is the panel on venture capitalists and where they're investing now and why.  It featured Chris Schultz (Operating Venture Capital), David Girouard (Upstart), Ari Levy (Bloomberg), Ron Suber (Prosper Marketplace), Pat Grady (Sequoia Capital).


Venture Capital Panel: Where Are They Investing Now & Why?

PG> Like industries with high rate of change.  Tech now creeping everywhere.

??> Moving from computing creating stage to computing development state.  Less focus geographically.

??> VCs look for people.  That's key.

PG> New enterprise software companies like Splunk, Workday, Palo Alto Networds, etc. will steal share from large old software tech, SAP, Microsoft, Oracle, etc.  People in private investment that are successful in private corps is because of long term thesis and understanding of future trends.

PG> Does not like Venture Debt.

PG>On paper Bitcoin is incredible.  Issue is overcoming inertia.  Potential is huge.

RS> On Prosper: Use 500 data points to underwrite borrowers.  Kickstarter is for equity.

On Upstart

New Oregon bill where 3% of income paid next 20 years instead of student paying tuition.

Predictions for huge business future

RS> Sending emails in future.

PG> Mongo DB, goes from stuctural database to unstructured.

DG>  Driverless cars will reshape need to own cars.  No need to own, car can just get you.  No need for garage.

Be sure to check out the rest of our summary of the Alpha Hedge West Conference.