Investor Displeasure

I think the worst thing you can do is try converting a prospect that isn’t interested in what you’re selling. We all have a natural instinct to control others, especially when there’s financial incentive. Deadlines, quotas and having to pay bills all exacerbate this instinct. But, I believe converting an unwilling customer only leads to drama down the line.

I believe in rapport over control. Building rapport develops trust and aligns interests. It allows each person to understand how the other feels about things. If they’re both fully expressive, they typically develop empathy toward each other and genuinely want to do what’s best for the other person. Any little inkling of trying to control the other derails the process. With regard to investments, you learn the philosophy, risk tolerance and performance goals of the investor or manger. Hiding feelings about these very important issues likely leads to poorer performance and additional drama (lawsuits, etc).

Today, many investors are expressing their displeasure about paying high fees to hedge funds who do not outperform the S&P 500 Index and / or who do not provide non/uncorrelated returns.

Why pay management and incentive fees to a hedge fund who correlates highly with the index and also underperforms it? If they produce similar results, you simply go with the cheaper option. No brainer.

Look a the chart below. Since my firm’s inception, the Barclay Hedge Fund Index (blue line) correlates highly to the S&P 500. The rolling 12-month correlation mostly sits in the 80–90% area. Hedge funds, as a group, are not unique enough to warrant their higher fees. If they were unique, correlation would be much closer to zero.

I believe the hedge fund industry is suffering from a severe case of groupthink, unoriginal thinking and laziness.

The hedge fund industry needs a return to original thinking and creativity. Going forward, the only way a hedge fund can demand higher fees is to either outperform the cheaper options and or deliver non/un-correlated returns.

To maximize robustness and performance, invest in as many different things as possible.

Investors are making all of us up our game. They’re saying…

If your returns correlate and outperform the cheap options, we like you.

If your returns correlate and underperform, we don’t want you.

If your returns do not correlate and outperform, we love you!

Investors are providing invaluable feedback to money managers, more expensive alternative ones in particular. They’re saying “get to work”; “give us something better”. Managers who do not adapt, but continue executing their unoriginal copy-cat strategies will likely have to resort to “creative” (slick) marketing, reduce fees or close up.

Disclosure

Past Performance is Not Necessarily Indicative of Future Results
There is always a risk of loss in futures trading.

This communication is for information purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy any financial product, an official confirmation of any transaction, or as an official statement of Melissinos Trading LLC. All information is subject to change without notice. Commodities: GSCI Total Return Index; Corp. Bonds: DJ Equal Weight Corp Bond Index; Real Estate: ETF ticker IYR; HY Bonds: S&P 500 HY Bond Index; MSCI EAFE: ETF ticker EFA.

The charts show examples of trends. Inclusion of a chart as a trend example does not imply any kind of recommendation to buy, sell, hold or stay out.