Friday, March 02, 2012
You Can't Handle the Truth
As an asset manager, you can perform all the "best practice" due diligence in the world with respect to your fund managers, but the irresistible lure of higher returns (and higher "alpha", whatever that means these days) will always attract folks who don't ask too many hard questions...precisely because they do not want to know the answers. Its a difficult game. The asset manager wants to know how and when a fund manager makes and loses money. The Fund manager wants to keep exactly how this happens a secret, as copying investment styles is the official sport of Investment Banks.
There are many successful Funds who claim to have some "edge" when investing. They usually cloak their styles in oppressively boring platitudes designed to mask what they actually do: engage in aggressive insider trading. There are also many successful asset managers who RELY on the returns provided by these Funds engaged in this activity in order to provide the maximum benefit to, say, pensioners with definable liabilities upon retirement. The minnow in this ocean are the people who get angry at massive Wall Street and Fund bonuses while happily cashing their pension or Life Insurance annuity check that has appreciated their savings to a considerable level.
The problem for an asset manager is maintaining a "of course we did not know our thoroughly vetted and investigated Fund Managers were engaged in such activity, Mr. FBI/SEC/FINRA/FED Enforcement Officer!" fascade of plausible deniability coupled with a steady hand on the switch to remove any and all assets from a Fund Manager in the event of a Indictment/Wells Notice/Formal Investigation/etc. by said authorities. Any such notice of formal investigation applies massive pressure on individuals to cooperate and indictments are imminent. These acts will be cited when said officers ask for a raise or run for Congress. Its how the world works.
This risk is massive at the moment, with all of the above in addition to States' AG offices scanning for any reason to bring scalps to a public demanding blood and "justice". But of course, the Asset Managers will be spared. Just as when Politicians receive large campaign contributions from "interesting" people. Plausible deniability is but another gear in the world's engine.
"There are two things that you don't want to see being made: Sausage and Legislation"
You can go ahead and throw persistent Alpha in with that.
Que Mr. Nicholson.