I saw that one of the hedge funds that has a position in my company executes a “top down, bottom up” approach to its investment selections. This was written in the fund profile section in Thomson ONE. What the hell does that mean? Thank you.
it just means a blend of both… top down macro/industry/strategy decisions coupled with individual security selection.
Top Down - Think of it like buying a home. You scope out states, then cities, then neighborhoods you want to live in. You find a block that looks good. Bottom Up - On the block that looks good, you investigate each home and look for the one that is the best value for its price. Most firms do one or the other, but some do this blend approach.
They are basically macro investors. There really isn’t a blend to the approach. It’s either you select securities on the basis on company fundamentals (bottom up) or you select the industry based upon your macro predictions (top down) and theoretically select superior securities within that industry selection. Macro predictions generally can’t be considered bottom up even if you select companies based upon fundamentals after selecting an industry. You already exclude yourself from being a bottom up investor by taking that first step.
Good analogy, thanks guys.
I think I can guess the company you work for kcin!
ValueAddict, The firm I am at is top down. They merged with a bottom up manager and now the PMs take the approach I described above. Is this common at all? Or is the firm I am at an outlier for the most part?
TheAliMan Wrote: ------------------------------------------------------- > I think I can guess the company you work for kcin! If you can I’d give you a gold star 
I can’t narrow down the one you work for quite yet.
Quant, That strategy is quite common. Top-down themes are selected and then individual companies are selected via a bottom-up approach. Most funds claiming to be purely “bottom-up” got crushed in 2008 as a result of paying no attention to the deteriorating economy. If they were market neutral it wouldn’t have mattered, but the majority were net long.
ValueAddict Wrote: ------------------------------------------------------- > They are basically macro investors. There really > isn’t a blend to the approach. > > It’s either you select securities on the basis on > company fundamentals (bottom up) or you select the > industry based upon your macro predictions (top > down) and theoretically select superior securities > within that industry selection. > > Macro predictions generally can’t be considered > bottom up even if you select companies based upon > fundamentals after selecting an industry. You > already exclude yourself from being a bottom up > investor by taking that first step. +1 What it probably means is this - they are top down but don’t ignore security fundamentals. I work at a bottum up shop. I think it irritates the CIO to say we’re bottum up because that implies we make decisions without considering macro trends/events. Many shops will consider firm, industry and macro factors. However, you have to start somewhere.
yeah the duo-approach is “hey look at us we take everything into account” which I think most people like to hear whether the firm truly follows it or not is a dif story, nonetheless I hear it quite often. EMHDenied: Market Neutral was still down 6% in 2008…so it would have mattered, just not to the same magnitude as some other strategies.
I think anyone who ignores the macroeconomic side of things is setting themselves up for an ugly collision with the pain train (assuming they’re not running beta neutral). If you’re purely bottom-up and running net long, a good portion of your return stream will be attributable to beta (which is fine, but I can tell you from experience that most investors severaly overestimate their ability to accurately forecast beta). I’m not saying you need to come up with a particular view, but you certainly need to be aware of the potential economic scenarios that may occur during your investment horizon. tvPM, I was speaking from a theoretical standpoint. If those market-neutral funds properly forecasted beta, they should have been up. In practice, this is almost impossible to do. But those market neutral funds are at least still operating.
By definition, top down and bottom up are just STARTING POINTS for selecting stocks & investments It shows lack of understanding of the concepts to say you are both
I think macroeconomic predictions are mostly wrong, so why take those crummy odds in factoring your decisions?
I use the top down, bottom up approach - but it has nothing to do with investing.
artvandalay Wrote: ------------------------------------------------------- > I use the top down, bottom up approach - but it > has nothing to do with investing. You drive a lifted '91 cabriolet?
artvandalay Wrote: ------------------------------------------------------- > I use the top down, bottom up approach - but it > has nothing to do with investing. +1