Many Investment Managers are insecure, and they should be

I met an investment manager the other day. He wanted to know what I did for a living, and I told him. He then asked me how much money I had under management. He was trying to size me up. Such is very common with investment managers, as many are insecure. I never asked how much money he manages, because I don’t care.

I advised that I trade on my own account, and advise others on successful financial strategies. He then had the lack of tact to ask how much capital I was trading with.

I replied, “enough to make a good living.”

What was really funny was our brief discussion on strategy (and I mean very brief). When I mentioned that I “pairs trade,” he looked at me like I was a three headed alien.

He  said, “You trade foreign exchange?”

No, “I pairs trade with equities,” I advised.

He looked even more bewildered.

I WOULD EXPECT AN INVESTMENT MANAGER TO KNOW THIS STRATEGY, WHETHER THEY USE IT OR NOT.  This is why many investment managers much prefer to deal with non-professionals amongst whom their lack of knowledge is less likely to be exposed.  “Pairs trading” is not for everyone, but it’s a strategy that can enhance a portfolio’s return. There are so many long and short-term strategies, that being an expert at all of them is probably impossible. However, the cream of the crop constantly strive to expand their knowledge so they can compete at the highest levels.

To pair trade equities, I seek highly correlated stocks in the same sectors. When I spot a deviation from the historical correlation, I might transact, seeking to profit on a correction of the deviation. For instance, if Goldman Sachs (GS) and Bank of America (BAC) are trending over the same path over a period of time and I spot a deviation in one’s path, I might sell GS short, and buy BAC, seeking to capitalize on the fact that GS might be perceived as overvalued, and BAC might be perceived as undervalued. Thus, I am using both technical analysis and fundamental analysis in this strategy. If GS decreases in price and BAC increases in price, I cash in my gains based on a pre-determined profit target, or cut my losses based on a pre-determined stop-loss threshold. I rarely “pair trade” on an intra-day basis, my holding period is usually at least a few days.  I also might spot a trend with an exchange traded fund. For example, I might buy the Financial Select Sector Spider (XLF), and short Goldman Sachs, similar to the above mentioned scenario.

IF YOU USE AN INVESTMENT ADVISOR OR INVEST IN MUTUAL FUNDS, MAKE SURE THE FEES ARE WORTH IT.  YOU MIGHT DO BETTER INVESTING IN INDEX FUNDS OR ETFs.

According to a recent Financial Times article, “the average total expense ratio (TER) for an equity fund is 1.75%.  .  . Commissions for share dealing, taxes, market making spreads, interest on borrowing and entry/exit commissions are some of the added expenses not factored into a fund’s TER, which only reflects a fund’s annual operating costs.”A mediocre to bad investment manager can make a good living if he or she can maintain funds under management. With $200 million under management, 1.75% is $3.5 million. With $2 billion under management, that’s $35 million (pays for a lot of Starbucks).

Today, investors have the greatest access to information ever.  To pay incompetent to mediocre investment managers to mismanage your funds by dollar cost averaging your portfolio towards zero during market downturns, while boasting about great returns during upturns, limits one’s financial freedom.  If you use an investment manager, make sure he or she is competent. No longer should mediocre managers be allowed to reap huge salaries in the midst of a lack of performance. TAKE CONTROL OF YOUR INVESTING.

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2 Comments

Filed under Finance

2 responses to “Many Investment Managers are insecure, and they should be

  1. Greg Collier

    I recently found out that the insecure investment manager I discussed in this blog post got fired back in July 2011; Many Investment Managers are insecure, and they should be.

  2. I find it ridiculous that a manager wouldn’t know about pairs trading. Pairs trading is to me, one of the most basic statistical arbitrage strategies. Not knowing of it implies he doesn’t know statistical arbitrage. And in my opinion, if you don’t understand statistical arbitrage, you shouldn’t be trusted with other peoples money.

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