Learning from hedge fund legends and other leaders

Last week I had the great opportunity to attend a huge conference in sunny Las Vegas for the alternatives investment industry.  Organized by Skybridge, the conference attracted between 1500 to 1800 attendees including speakers, managers, service providers, and investors which include family offices, fund of funds, corporate treasurers, universities, pension plans, endowments, foundations and other institutional investors.  The conference has the reputation of a Davos for hedge funds, and the planning, speakers lined-up and execution were excellent. 

There were many interesting speeches and a few ideas stuck with me:

Macro themes:

• Views by economists on the 2H and 2012 growth prospect of the U.S. economy and the outlook for the S&P index were as contrasting as day and night though there is no doubt that corporate credit/cashflow/profitability (40% of the latter is coming from overseas) is very strong, which is a catalyst for more capital expenditure and stronger aggregate demand.
• Macro factors have been driving performances in most investment strategies, and have overwhelmed equity fundamental long/short portfolio; however more managers are expecting lower correlation of asset classes going forward, with increasing dispersion of performance within sectors, and a better environment for bottom-up or event-driven strategies, and therefore alpha-seeking.
• A Harvard economic historian is warning last 500 years of Western dominance is ending with key decisions going to be taken in Asia (China/India) and not the West in the next 20 years. A similar warning is made by Milken Institute that while U.S. consumers are spending almost 50% on housing and transportation but 2% on education, Asia is focusing more much on education, about 15%; and the 21st century is about development of human capital.      

Hedge fund operation and business:

• Hedge funds need to acquire institutional quality in the areas of back office, capital raising, independent fund administration, internal control and audit environment.  About 70% of the capital flow for hedge funds come from institutional investors which demand robust system and information that is repeatable, reliable, inventoried, audit-able and consistent. The latter means hedge funds need to move away from Excel spreadsheets for tracking performance and risk but build a repeatable and control process that can be shared.  
• For best practices of hedge funds, Merlin Securities in their white paper on "The Business of Running a Hedge Fund" suggests that those hedge funds that operate within the "Green Zone" of revenue/expense versus assets under management (AUM), which means funds which keep their fixed expenses lower than their management fees rather than rely on an out-sized performance fee, have a better chance of weathering downturn and surviving for the long term. 
• On top of data transparency, investors are insisting on "social transparency" - the culture and type of characters of managers investors are dealing with are very important.
• Be very good friends with capital introduction group. 
• Think about the behaviour of your investors especially in a downturn.

From hedge funds legends and leaders:

- On building culture and an institutionalized business:

• Important to understand what your values are and make sure all employees understand these values.  Alignment of firm with leader is key to success of firms.  
• Keep a team P&L and emphasize team effort, collegiate culture, common sense, pollination of ideas and employee self-improvement.
• Put process before outcome - investing, recruiting, and training all need to be consistent.
• Use crisis to build up talents, infrastructure and trading systems.  The head of Skybridge who was the chief organizer of the conference told how Skybridge in 2009 was almost "a blown-up Bridge" as the fund of funds business was deeply declining. Yet, he made a "marketing offensive" and took the cue from President Obama who suggested citizens should invest in the stock market in 2009, and launched the first Skybridge conference in Las Vegas to stimulate jobs there and to tell everyone out there that Skybridge is still alive.  Skybridge is now running $8bn in AUM and the number of conference attendees jumped from 400 in 2009 to almost 1800 this year.

From the World Leaders:

• The highlight of the conference was CNBC Melissa Lee's interviewing President George W. Bush, who was promoting his recent book "Decision Points."  It was heart-warming to hear how President Bush made decisions during the 2008 financial crisis.  President Bush, who did not know anything about the "TED spread" praised and gave his complete trust to his Treasury Secretary, Paulson as well as the Central Bank.  He also made the point the way to combat global terrorism is to promote democracy and freedom. "The long-term solution is to promote a better ideology, which is freedom.  Freedom is universal."  The presidential comment won a big round of applause.  
• It was fascinating to hear former U.K. Prime Minister Gordon Brown cheering for the U.S., praising U.S. outright as the most innovative and dynamic country in the world, and urging U.S. to keep up with the optimism to recover and dig out from the fiscal mess.  PM Brown also did not believe that the Euro would break up as the European Union was a political decision from day one.

From Freakonomics' authors:

• One should take time to think, to develop insights and ideas which is particularly important for hedge fund managers who should go find something to distinguish himself or herself, often the less desirable the better.
• Discussed declared preferences vs. revealed preferences - ideas come from data, but in understanding data, you need to know what really happens in real life versus what other people want you to know.