Ugh, it’s pretty prominent. But not until you get to Level III.
FrankArabia Wrote: ------------------------------------------------------- > It’s > shabby practice to not indulge in what you’re > selling. If I lose people’s money, I should pay > the price. I believe there has to be some > downside. I disagree. If I own an ice cream stand, I should eat nothing but ice cream? On the contrary, I would think in my daily life I should eat more vegetables than the typical human being just to compensate for all the ice cream I sneak in at work. Regardless of how good my ice cream is. Besides, there is still plenty of downside: You lose people’s money you get fired.
What other downside do you expect? You may lose your job, reputation damage meaning you’ll have difficulties to find another job plus being discussed as a joke on the street… come’n, we’re all nice people.
monger187 Wrote: ------------------------------------------------------- > I disagree. If I own an ice cream stand, I should > eat nothing but ice cream? On the contrary, I > would think in my daily life I should eat more > vegetables than the typical human being just to > compensate for all the ice cream I sneak in at > work. Regardless of how good my ice cream is. > Besides, there is still plenty of downside: You > lose people’s money you get fired. I think a closer metaphor is you running an ice cream stand yet being lactose intolerant.
FrankArabia isn’t saying that the guy’s whole net worth should be put into their fund, but merely that it aligns their interests with shareholders. I can agree that it may not be necessary to deliver value for investors, but it surely is beneficial…If your only income is through fees from the fund, you’ll be rewarded tremendously even if they don’t perform well.
bchadwick Wrote: ------------------------------------------------------- > Ugh, it’s pretty prominent. But not until you get > to Level III. Palantir is correct. I find it funny that people here would disagree with that statement. If you were in an interview, and they asked you that, i hope you tell them.
Thank you Frank. How I lived without you to enlighten me I will never know. Palantir is right. We agree on that. There’s a marketing reason to do it, which is to satisfy the investor that your interests are aligned. That’s so blatantly obvious that I didn’t realize we were getting to that level. But there isn’t a portfolio management reason to do it, and the marketing comes at a cost to the manager, which is that all or most of their risk is loaded up on the same factor when it normally shouldn’t be.
I think we’re all talking about the same situation; essentially “To what extent should a portfolio manager invest in the fund that he manages?” The confusion is that the answer to this question is completely different (ie. opposite) depending on whose perspective you are taking: FROM THE PERSPECTIVE OF AN INVESTOR IN THE FUND: It is clearly in the best interest of investors for the fund manager to have a very large portion (all?) of his financial wealth invested in the fund, in order to further align the fund manager’s interests with those of investors. FROM THE PERSPECTIVE OF THE PORTFOLIO MANAGER: When diversification is considered, it’s in the best interest of the portfolio manager to invest NONE of his financial wealth in the fund he manages. This is because his financial future is already too hightly correlated with the performance of the fund, ie. if the fund doesn’t perform well, his career is going to go down the tubes.
Nicely put, Wendy. 
The CFAI reading is called “Lifetime Financial Advice: Human Capital, Asset Allocation, and Insurance”, and it’s been in the CFA Level III curriculum since 2010. http://investisseurautonome.info/PDF-Downloads/PLACEMENTS-ALTERNATIFS/doc.1051-ibbotson%202007%20annuities.pdf Basically, the reading suggests that folks that work in jobs related to equities, shouldn’t additionally invest in equities. (Let alone investing in their company stock, or investing in the fund that they manage.) Here are some excerpts: " To reduce risk, financial assets should be diversified while taking into account human capital assets. For example, the employees of Enron Corporation and WorldCom suffered from extremely poor overall diversification. Their labor income and their financial investments were both in their own companies’ stock. When their companies collapsed, both their human capital and their financial capital were heavily affected. " " It may seem odd to advise future practitioners in the equity industry not to “put their money where their mouths are” (i.e., not to invest more aggressively in the stock market), but in fact, hedging human capital risks is prudent risk management. Indeed, perhaps with some tongue in cheek, we might disagree with famed investor and stock market guru Peter Lynch and argue that you should notinvest in things you are familiar with but, rather, in industries and companies you know nothing or little about. Those investments will have little correlation with your human capital. Remember the engineers, technicians, and computer scientists who thought they knew the high-technology industry and whose human capital was invested in the same industry; they learned the importance of the human capital concept the hard way. " " Company executives, stockbrokers, and stock portfolio managers (whose labor income and human capital are highly correlated with risky assets) should have financial portfolios invested in assets that are little correlated with the stock market (e.g., bonds). "
Wendy Wrote: ------------------------------------------------------- > The CFAI reading is called “Lifetime Financial > Advice: Human Capital, Asset Allocation, and > Insurance”, and it’s been in the CFA Level III > curriculum since 2010. > > http://investisseurautonome.info/PDF-Downloads/PLA > CEMENTS-ALTERNATIFS/doc.1051-ibbotson%202007%20ann > uities.pdf > > Basically, the reading suggests that folks that > work in jobs related to equities, shouldn’t > additionally invest in equities. (Let alone > investing in their company stock, or investing in > the fund that they manage.) > > Here are some excerpts: > > " To reduce risk, financial assets should be > diversified while taking into account human > capital assets. For example, the employees of > Enron Corporation and WorldCom suffered from > extremely poor overall diversification. Their > labor income and their financial investments were > both in their own companies’ stock. When their > companies collapsed, both their human capital and > their financial capital were heavily affected. " > > " It may seem odd to advise future practitioners > in the equity industry not to “put their money > where their mouths are” (i.e., not to invest more > aggressively in the stock market), but in fact, > hedging human capital risks is prudent risk > management. Indeed, perhaps with some tongue in > cheek, we might disagree with famed investor and > stock market guru Peter Lynch and argue that you > should notinvest in things you are familiar with > but, rather, in industries and companies you know > nothing or little about. Those investments will > have little correlation with your human capital. > Remember the engineers, technicians, and computer > scientists who thought they knew the > high-technology industry and whose human capital > was invested in the same industry; they learned > the importance of the human capital concept the > hard way. " > > " Company executives, stockbrokers, and stock > portfolio managers (whose labor income and human > capital are highly correlated with risky assets) > should have financial portfolios invested in > assets that are little correlated with the stock > market (e.g., bonds). " Wendy you’re a G.
why are you rehashing CFA material as if that actually proofs anything? I really can care less what the CFAI certifies as “proper behaviour” or “sound investing principles”. I would suggest you do some thinking on your own. There are plenty of prominent investors who share my view. Bchad, the game is different when you’re actually trying to invest money for people seriously.
Or you can be like Buffett and not only put your whole net worth into your fund, but also demand that your investors do as well! lol.
FrankArabia Wrote: ------------------------------------------------------- > I would suggest you do some thinking on your own. > > > There are plenty of prominent investors who share > my view. These seem to be conflicting statements. And yes, the mere fact that this is so common is exactly why I think it’s something to think about. Most of us seem to agree it’s unwise financial policy to invest a lot of your own money in your own fund or strategy. But most of us (not me) also seem to want to hear from managers that they do exactly this. I interview managers several times a week for my job and almost all of them throw this out as if I should be impressed. To be honest I would be more impressed if a manager answered this by explaining that he invested outside his own strategy in order to better diversify his risk. They’re supposed to be the experts, shouldn’t they understand this concept?
In terms of picking a HFM manager, I definitely want one with significant skin in the game whose interests are aligned with the portfolio and not just on the performance fee. As for managing my own account, funds where I have worked had strict investment policies that only allowed investing in treasuries or the directed options in the 401K. Outside of that no investing allowed, pre-existing holdings when hired can be sold with prior approval and proper notice of management. Policies such as these make it difficult to invest even if one did have the time.
Wendy Wrote: ------------------------------------------------------- > Indeed, perhaps with some tongue in > cheek, we might disagree with famed investor and > stock market guru Peter Lynch and argue that you > should notinvest in things you are familiar with > but, rather, in industries and companies you know > nothing or little about. Yeah, that seems like a great idea – invest in things you know nothing about. I guess Lynch must be a real screwball since he only made $300+ million investing in things he knows. Typically stupid comment from the CFAI. More worthless advice from a worthless institute.
“Tongue in cheek” means that the statement is meant to be humorous. They are exaggerating to illustrate a point; not giving advice that you should act upon literally.
CFAI has a point, many people who do have deep knowledge about their industry don’t necessarily transfer that knowledge to the investment process.
No matter what a good hedging strategy is, as a portfolio manager if I think that a particular stock is a great idea, it would be in the fund that I manage and in my personal holding (provided it is allowed). Why wouldnt you invest in something which has to go up? If you have doubt than I think you are doing a disservice to your investors.
Seems like we’ve failed to consider the fact that not all funds / portfolios have a mandate even remotely appropriate for an individual to invest in. There will always be cases where an IPS aligns with the managers age/ capital position, etc., but that will not always be the case. Why would someone running, for example, an energy portfolio need to be invested in it? A leveraged MUNI find… a EM high yield fund…There are many cases where the benchmark may be, for hedging purposes or otherwise, contrary to general market logic and a bad fit for individual investment. Each manager is inherently vested in that 1.) he wants his job. And 2.) compensation is typically tied to performance (whether directly- bonus, or indirectly- AUM inflows). Now stock pickers is another story, although one could argue, especially with lower liquidity names, that investing in one’s recommendations equates pushing your book.