Zeroism and the Allocator Status Quo
September 21, 2021·2 comments·In Brief
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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.
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Comments
After almost 20 years marketing “alternative” asset managers to institutions, I have to say that this is, by far, the most penetrating look into the institutional decision making process that I have ever seen. We raised capital for all manner of hedge funds–but, since the GFC, have stuck to the illiquid strategies (PE, VC).
We are currently marketing a crypto fund, targeted at $600 mm, with no hard cap, so I can report that the facts on the ground, today, are exacly as described.
Interestingly, demand is coming from the clients of wealth managers and clients of consultants–though mainly wealth managers. Wealth managers cannot insulate themselves from their clients’ willingness to think outside the box. Consultants, on the other hand, are hidebound much more than most institutional allocators–but still have to answer to their clients. The consultants’ discretionary clients, along with the OCIO crowd are certainly not getting recommendations to invest in crypto. The standard refrain is: “we have a bit of exposure through our VC portfolio and don’t really need any more, we’ll wait and see what happens.” Notably, it’s only the non-discretionary wealth managers and consultants clients’ who are putting the pressure on their advisors to check out crypto managers.
In organizations with diffuse ownership (pension funds, endowments, foundations, insurance companies, and funds of funds to name a few) it’s a circle jerk all the time, all around. But, just like the single guy dancing at the concert, if the institution is serious, there MUST be literally an internal champion for crypto. And this individual can come from different parts of the firm.
One major public pension fund has the head of their RE activity heading up the crypto team. Why? Usually, it’s because he’s the guy who invested personally and is fascinated with the potential of this new technology. Most of these champions are younger, natch. And most are crypto investors. But there are a few very senior guys who have profited greatly from crypto. In those cases, they have not reached into their own organizations to shake up the complacency. They have made their fortunes and don’t need to upset the applecart in their firms.
In any event, this article was absolutely 100% spot on. Thanks for writing it, Eddy!
I found this post very interesting, thankyou! I am a young, independent trader of 10 yrs currently looking to enter the world of managing other people’s money.
I disagree with the points about skin in the game. I’d never invest in someone who didn’t put the majority of their liquid net worth into their strategy (or strategies). Of course there are examples of investors who lost it all and it was their own money, however you could probably find a greater number of examples of investors with zero skin in the game that lost more.
Even if a manager has little capital of their own to commit, they can certainly sign an agreement to reinvest a certain percentage of their profits. At the end of the day if you truly believe in yourself then you want to reinvest and compound as much as possible.
From the outside looking in the trading talent looks old and institutionalised, with no incentive to take risk, just to survive and knock out high single digit returns year after year.
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