Institutional Investment Strategy: Reduce, Reuse, Recycle
Apr 2nd, 2007 | Filed under: Hedge Fund RegulationThe investment buzz has come almost full circle
By: Milton Ezrati, Lord Abbett & Co.
Published: April 2, 2007
Milton Ezrati (member of the Portable Alpha Hall of Fame) writes an interesting op/ed today in Investment News. If you subscribe to their email, scroll all the way to the end of it. If you do not, then click here to view the piece via our relationship with InvestmentNews.com.
To summarize, Ezrati says a growing institutional appetite for long exposure (vs. hedge fund exposures) comes at exactly the wrong time in the cycle. In fact, Ezrati says this is exactly what happened in 2002 when institutional investors clamored for hedge funds – convinced markets would continue to flounder. We were wrong then and we may be wrong now.
Says Ezrati:
“This news would be funny were it not also so sad, for it brings the investment buzz almost full circle to where it was some 10 years ago.”
Markets have appreciated for several years now. After losing money on short positions for most of this time, institutions are fed up with long/short strategies according to Ezrati (although we don’t actually see any empirical evidence of this). In his words:
“…investors seem to have decided finally that hedged portfolios, with their now seemingly vulnerable short positions, offer none of the hoped-for salvation that they once promised when the market was suffering. So investment fashion has turned again, now against hedged approaches and toward long-only approaches.”
“The real losers will remain the fashion-conscious investors, who switch strategies in order to pick up the most recent winners.”
Apparently it’s tough for a (long-bias) tiger to change its stripes though. After laying the groundwork for an argument that now is the time to check out of the long-only hotel, he pulls up somewhat short:
“The new fashion [long-only investing] still is young. The equity market has ample fundamental support to rise still farther and reward long-only strategies at the expense of the hedged approach. But if history is any guide, these expected advances will raise the enthusiasm of the fashion conscious, so that in the fullness of time, just as before, they will exaggerate the approach, leverage their long-only strategies and focus their portfolios narrowly on whatever groups happen to lead this time.”
This leaves us wondering if we are at the zenith of the long-only fad (exactly the wrong time to go long) or somewhere in the middle (a pretty good time to go long). In other words, if you pick the “most recent winners”, will you become a “real loser” or be rewarded “at the expense of the hedged approach“?
According to Ezrati, it seems this is one fad that deserves to be recycled just a little longer.
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