Excuses, excuses followed by more excuses. When is the broader asset management industry going to put its hands up and say; "We were wrong," or "We really don’t know what we are doing," or even, "I’m going to fall on my sword, sell my five houses on the Wentworth Estate and distribute the proceeds among those foolhardy enough to believe I could make them money"? The answer of course is NEVER!
We’ve just had a dreadful quarter for stocks, and the long equity brigade will be putting on their tin hats waiting for the redemptions.
In this very column a month or so ago I bemoaned a whole raft of excuses touted for underperformance. Excuses range from excessive risk asset correlation hurting our strategy to, well actually, if you look at our relative performance to benchmark then we’re actually doing rather well. Nonsense.
One of the oldest excuses in the book, and one that's going round again, is about mandate. If you look at our mandate, they say, we aren’t actually allowed to hedge our long portfolio. We have to hold a minimum exposure in stocks, they say, and the investors get very worried whenever we start talking about protection, overlays and options.
Hmm, are these managers sure that it’s the investors who are worried about overlays? Or is it the fact that even after all these years of hugely volatile stock markets, the broader asset management industry still hasn’t bothered to learn what an option is?
Let’s be clear here. No one is talking about adding complicated OTC products to a portfolio. What I am suggesting is really basic: go and open the Derivative Book for Idiots on page one, read what a long put is, turn to page two learn how a long put added to a long underlying stock portfolio creates a hedged downside with only a slightly diminished upside and then CLOSE THE BOOK.
Then the asset manager has to find out which exchange offers a put option on the index or stocks that he or she is most exposed to and wait for the rally to buy some protection.
Even if the education bit goes well, this last bit may be the most challenging of all: You only see people talk about protection when the Chicago Board Options Exchange Volatility Index (VIX), or whatever the European at-the-money volatility equivalent measure is, trades sky high as markets plummet.
No one ever seems to get excited about the VIX when markets are at the top of the trading ranges and the premiums are cheap. You see, for fund managers, if markets are going up, then they tend to be making money, so why give up on some of that precious performance by taking out expensive protection on a product that will expire in a few months anyway?
This is where, I suggest, the problems lie. Downside protection isn’t sexy. In fact, for many European regulators it’s downright heresy to want to own downside products. Until managers gain a little bit more knowledge about the available listed products and perhaps are willing to give up on a minimal amount of upside gains when the times are good, then we will remain doomed to repeat the same old mistakes and come up with the same old tired excuses.