Co-founder @venhedge — multimanager investment firm in SF. Not financial advice. Not soliciting investors.
Joined October 2012
- Tweets2.1K
- Following2.5K
- Followers553
- Likes4.5K
Pinned Tweet
Optimal Diversification = Stocks + Hedge Funds + Private Equity + Venture Capital + Real Assets + Digital Assets + Cash & Credit
I learned a tough, good lesson Oct. in a diversified portfolio, having >30% of NAV in market-neutral strategies is not quite sufficient for risk control. There also needs to be ~1-2% allocated to convex left-tail hedges across a variety of risk exposures. Same goes for the right tail.
Investing in managers, I want them to be concentrated in their best ideas. Risk management then comes from diversification across many independent managers.
Best Ideas
hbs.edu/ris/Publication%20Fi…
We find that the stocks in which active mutual fund or hedge fund managers display the most conviction towards ex-ante, their “Best ideas,” outperform the market, as well as the other stocks in those managers’ portfolios, by approximately 2.8 to 4.5 percent per year, depending on the benchmark employed. The vast majority of the other stocks managers hold do not exhibit significant outperformance. Thus, the organization of the money management industry appears to make it optimal for managers to introduce stocks into their portfolio that are not outperformers. We argue that investors would benefit if managers held more concentrated portfolios.
Every well-diversified portfolio needs a low-correlation bomb shelter allocation.
Especially the more risk on, aggressive investors. The bigger the tolerance for high-vol allocation, the bigger the low vol bedrock should be. Barbell must balance.
Sustaining above-average investment performance goes far beyond being able to identify great assets. Position sizing, risk management, instrument selection, the list goes on.
One of the most important first principles in portfolio management is to maintain a minimum allocation to lower risk “market insensitive” assets such as hedge funds, cash, bonds, reinsurance, etc. These assets comprise the ballast upon which a portfolio can comfortably stack riskier strategies.
We used to spend 20,000 hours per year across 20+ people auditing the financial statements of a large hedge fund. With AI that could be done in less than 2000 hours across only several people and with far higher quality. Let’s see what happens to audit fees in the decade ahead.