Locusts’ Lament


After publishing a few In Brief pieces featuring Quid-based narrative maps, we received a number of emails from subscribers asking us for analysis on other topics. 

For those who have read prior notes, you will know that what I usually find most interesting are areas in which otherwise similar topics or words engender very different sentiment and narratives, or in which different universes of authors, commenters and missionaries conjure up different narratives tailored to produce separate responses from distinct audiences. When one long-time reader expressed curiosity about narratives around private equity, I was intrigued. Its results surprised me. But it wasn’t until I checked it against a comparable topic that I found the narrative dimension I really wanted to explore.

First, let’s take a look at the narrative map – as usual, with major cluster names joyfully designated by me with both flippancy and bias – for private equity in 2018.

Like the historical treatment of the big tech stocks in media I highlighted last week, media treatment of private equity in 2018 has been glowing. Of the more than 3,100 news stories referencing private equity this year, the positive-to-negative sentiment ratio was nearly 16-to-1. What is more interesting, perhaps, is that a huge number of these stories are using very similar language, terminology and structure. Shown graphically, you see this as the almost non-existent distance between the various clusters. The stories about what allocators are doing are frequently also about dry powder, and frequently also about operational improvements and valuations. In rare cases, they spare a moment to reference the loss of generational businesses, factories, storefronts, high street shopping districts and jobs.

You would be forgiven – especially after the big tech piece – to question whether my priors about the infrequency of this kind of sentiment about financial topics are inaccurate. So let me show you another narrative map. This time? Hedge funds. Same period. Same sources.


First, let’s talk about the sentiment. Remember how the ratio of positive-to-negative for private equity was nearly 16-to-1? For hedge fund stories, that ratio is about 0.3-to-1. In other words, that’s a 3-to-1 ratio in favor of articles written with negative language, terminology and structure. To be clear, some of that is going to be picked up in periods of bad performance just by factually representing that performance. But interestingly for 2018, hedge fund performance has not been especially bad relative to traditional assets or other alternatives. In fact, some hedge funds are having a decent year.

More importantly, the negative sentiment pervades the stories that cover hedge funds on just about every topic. The same glowing discussions of operational improvements by private equity are all about the uncomfortable language of shareholder activism when it comes to hedge funds. Basically the only clusters with non-toxic sentiment are (1) excited discussion of cryptocurrency fund launches and (2) exposés into how difficult it is to get hedge fund jobs.

Fascinatingly, as you see from the relatively distinct clusters, there isn’t a recurring narrative. Nothing that really creates strong links between all these articles, besides the idea that hedge funds are bad. It is simply a topic about which common knowledge is so strong that just about any pot shot will land. There’s no need for any art – just mail it in. Hedge funds are the range pickers at any driving range in America – an irresistible target, and one for which the attacker is unlikely to ever get anything more than the most perfunctory tsking from another golfer.

You won’t find me or Ben arguing that there isn’t truth in some of the stories. We’re on record, for example, opining that the most positively selected trait for hedge fund PM success is probably sociopathy. But the idea that every activist PM is Gordon Gekko and every MD at a buyout shop is Mother Theresa is pure narrative.

Ultimately, however, this is what the lazy, complacent cartoon formed around a view that has been correct for a very long time looks like. Lest we let all this discussion of narratives get in the way of the facts, let’s recall that hedge funds have had a very bad run of performance in almost every category in comparison to nearly any other alternative strategy or traditional asset class. On an absolute and on a risk-adjusted basis. Private equity has performed much better, and because it is usually treated as an either/or with hedge funds by financial and broad media who don’t really understand the very different roles they play in portfolios, some measure of difference in treatment is appropriate.

But there are still some lessons to be gained here:

  • Hedge fund managers: Start playing some metagame again, for God’s sake. Aren’t half of you supposed to be WSOP headliners?
  • Private equity fund managers: Yes, you’re very smart. Everybody says so. But if you care about the long-term integrity of your franchise and your investments, be especially cautious about believing your own bullshit right now.
  • Allocators to alternatives: I would be obsessively focused on finding hedge fund managers with process that has been resilient to the last 10 years, even if it hasn’t worked, and on private equity managers with humility and introspection about the sources of their success over the last 10 years.
  • Everyone: I would be cautious of consultants or advisers whom you observe painting either strategy with a broad brush today. If someone is pushing private equity to you aggressively as a panacea, or seems to constantly, strangely bring up vague criticisms of hedge funds, you’ve probably found the easy mark the missionaries were looking for. That is usually a good sign that this consultant or adviser is not the guy or gal YOU are looking for.

If you’ve got other topics you’d like us to examine under this lens, be sure to drop them into the comment section here.


To learn more about Epsilon Theory and be notified when we release new content sign up here. You’ll receive an email every week and your information will never be shared with anyone else.

Notify of
Inline Feedbacks
View all comments
Ken P
2 years ago

Thanks for the great article Rusty! You mentioned in Investing with Icarus that broadly you are thinking real assets are a key to future investing and recently Ben mentioned real assets again in the Narrative Giveth. I’m sure you both will expand on your thoughts and my guess is it’s related to the inflation story picking up steam if we get a hot inflation print number.

I’m just struggling with how that will work with the “traditional” private real assets; timberland, farm land, and infrastructure. I saw WSJ article saying that infrastructure funds are breaking records raising capital this year after breaking them last year. I saw another WSJ article about how we have an overabundance of pine trees in the South due to huge tree farms planting trees 20 years ago and now we don’t have any mills so it’s killing timber prices. And I haven’t looked but can’t imagine farm land is doing too well given the targeted Chinese tariffs. Maybe it’s a buy the blood situation but it seems like there are huge amounts of money already being poured into these areas by institutional investors, depressing future returns. Just curious if you had any preliminary thoughts you could share.

Thanks again for the article and gladly joined the pack today.

Ben Hunt
2 years ago
Reply to  Ken P

Briefly … I have a very expansive view of what constitutes a real asset (for example, I would include intellectual property as a real asset), but I am a stickler for cash flow. So I’m less keen on farmland and timber (meager to nonexistent cash flows) as “real assets” than I am on widely licensed intellectual property (strong cash flows) as a “real asset”. The sweet spot for me would be strong cash-flowing infrastructure assets … a bit “realer” than IP, but less commodity-like than land or timber. As with all things in an inflationary or deflationary environment, the three most important attribute of any asset, cash-flowing or not, is pricing power, pricing power, and pricing power.

2 years ago
Reply to  Ben Hunt

Ben, what is your view on expropriation when it comes to real assets? Your thesis relies on the assumption that the rule of law will hold and that those laws will not change to suit those in power to your detriment. I believe that one of the themes in your writing is breakdown in personal integrity within the society as it polarises. It will get worse as those who chose to live what they preach walk away (those that stay are not the same) – that leaves law making and implementation to those who want to get one over the others and to those with relaxed moral compasses. Look at the emerging markets where the inflation never stopped and in some cases is getting really bad – real assets which should perform get taken away by raiders paying off the courts or by the governments. This can take many forms but result is the same – the asset stops performing or you lose the claim to your asset despite all the necessary conditions being in place. I agree that on the margin real is better than leveraged zombie if we are going where you say but at the limit they both go to the same outcome just with different trajectories. Unless, that is, you consider that performance of the asset is also a function of who is holding that asset. For the insignificant investor I can’t help feeling that it will still come down to timing – I know it… Read more »

Ben Hunt
2 years ago
Reply to  D_R_lowfade

I get very nervous about “owning” real assets that are outside my home country. Expropriation is definitely a thing, and it’s a thing that is ignored until it is EVERYTHING. Politics always trumps economics. And yes, pun intended.

On “team elite” background … I think that Team Elite membership, like membership in any cult, is a state of mind thing, not a where-did-you-go-to-school thing.

The Latest From Epsilon Theory


This commentary is being provided to you as general information only and should not be taken as investment advice. The opinions expressed in these materials represent the personal views of the author(s). It is not investment research or a research recommendation, as it does not constitute substantive research or analysis. Any action that you take as a result of information contained in this document is ultimately your responsibility. Epsilon Theory will not accept liability for any loss or damage, including without limitation to any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Consult your investment advisor before making any investment decisions. It must be noted, that no one can accurately predict the future of the market with certainty or guarantee future investment performance. Past performance is not a guarantee of future results.

Statements in this communication are forward-looking statements. The forward-looking statements and other views expressed herein are as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated in any forward-looking statements, and there is no guarantee that any predictions will come to pass. The views expressed herein are subject to change at any time, due to numerous market and other factors. Epsilon Theory disclaims any obligation to update publicly or revise any forward-looking statements or views expressed herein. This information is neither an offer to sell nor a solicitation of any offer to buy any securities. This commentary has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Epsilon Theory recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.