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Why Not Active Management?


The following comments were received from a prominent Canadian Hedge Fund manager regarding my latest Blog post: Why Gold? Why Now?

“Seriously Doug,

Personally called long gold at 800 in countless commentaries. Sure it may have no real value but if China forced a gold standard for US debt the denominator to reserves would be 9000. Long gold does not mean end of world and it has physical value against FIAT currency that does not for one simple reason. Surely an ETF portfolio designed to own one share of planet Earth can accomodate (sic) some active calls to pragmatically manage real human risk?

I don’t see why individuals can’t have truly active management.  The only risk for investors is “not funding a future obligation” and the job of money management for individuals is to secure and grow spending power – that is it.  Within that framework, adding 50% truly active through market neutral and managed futures adds huge stability to the overall equation.  Since both are available via fully regulated mutual funds and in our case have dramatically outperformed the index/peer group in both absolute and risk adjusted results net of fees.  See below – 25% to each strategy, rebalanced annually.  Wouldn’t investors prefer better than equity returns with bond like volatility over the long haul?  And the 2 indices for the alternative strategies are net of fees and not investable.”

My comments back:

  1. To quote from this Hedge fund manager’s web site … “We believe the fund industry is fundamentally broken. The fund industry puts its own interest ahead of its investors.  That is wrong.” I concur. The missing link between good, active management and the Individual Investor is client-appropriate advice. ‘Twas ever thus … and a basic sub-theme of this Blog. (Apologies to ‘good’ Advisors).
  2. In my Why Gold? Why Now? Blog post I offered for consideration 11 alternatives to invest in physical Gold (as per Dylan, the commentor’s request). 6 are ETFs. 5 are active. A fair representation, I thought.
  3. There are active investment managers and hedge funds that work just fine. Obviously, this hedge fund is one of them or they wouldn’t have $Billions of assets under management. Institutions spend a lot of time, money and resources searching for these good, active investment managers. Most Individual Investors don’t. Nor do their Advisors. Active management was never in question … for Institutions.
  4. The theme of this Blog is “Institutional Investing for Individual Investors”. The premise is that there are some lessons from the Institutional Investing world that the Individual Investor can benefit from. One lesson is that, if the investor does not have a process for portfolio construction and/or manager selection … then index (and use a Pension Plan as a model). Another lesson is that Individual Investors have a tough time finding good, objective advice. Further, if the majority of Individual Investors (and their Advisors) don’t yet ‘get’ the very basics of Asset Allocation, after 60 years of practice in the Institutional world, then surely we can agree that introducing most Individual Investors to Hedge funds would be irresponsible. I maintain that Active management is appropriate for Institutional Investors who have the resources to do due diligence. ETFs are appropriate for, at the very least, the core holdings for most Individual Investors. Sure, complement the core with active manager satellites (as suggested by this hedge fund manager). Wouldn’t it be nice if the Individual Investor could count on objective advisor advice to do so?
  5. I wrote Why Gold? Why Now? with the intent of delivering a dose of sarcasm. It didn’t work. Mea culpa.
 Next time?
Risk Management.
Doug Cronk CFA is Manager, Investments for a Canadian Pension Plan
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2 Comments Post a comment
  1. Happy to hear that the approach makes sense for you. Why re-invent the wheel? Why not learn from and leverage off of all the work and resources from the Pension Fund world? Makes sense to me

    Like

    July 23, 2011
  2. JTN #

    I for one appreciate the perspective on this blog. I hope to understand the markets a bit more by taking a DIY indexing approach for the next few years. Doing it the way that a pension fund does it is convincing to me.

    Like

    July 22, 2011

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