As August turns into September, paid subscribers will be receiving a number of new postings, including ones regarding interviewing, investment committees, insider trading, intelligence analysis, and the challenge of complexity.
If you’re not a subscriber, sign up for a two-month free trial to see all of those and more, plus access to the complete archives.
Goldman
There is palace intrigue at Goldman Sachs, with numerous press accounts indicating that CEO David Solomon is on the hot seat. How much of that coverage is orchestrated by insiders is hard to tell, but it has been notable that a number of high-level people have left the firm in the last few months, which seems out of the ordinary. An article in New York offers a look at Solomon and the situation he faces.
A fascinating perspective is put forth by Gapingvoid in a posting titled “Not Everyone Wants Kinder and Gentler,” in which Goldman is compared to the French Foreign Legion:
A very unique, proud, brutal culture, born out of hardship, being uncompromising, being world class bad-asses, and being able to instill genuine fear in anyone going against them.
One school of belief about investment culture (as expressed in the posting) says, “If you’re going to swim with the sharks, removing your teeth is the last thing you need to do.” But grooming people who will attack the market and competitors but not each other is a fine art.
AI investing
Saguaro Capital Management released a report, “From Data to Decisions: A Primer on AI in Investment Management.” It aims to provide a guide for practitioners that avoids the “esoteric, sometimes bordering on indecipherable” approach of academic papers and the “fear or fluff” of popular articles that don’t “provide substantial examples or actionable next steps.”
The report covers a lot of ground. As a first step, the firm says that organizations must truly embrace AI:
Embrace the flux inherent in the field, embrace its fluid nature, and embrace its relentless progress.
Beyond that, the factors for success will be the speed of adoption, the ability to surface idiosyncratic data, and the willingness and ability to adjust investment processes in response to the new capabilities. Saguaro recounts its own development (and shares its technology stack), offering examples in the categories of idea generation, data gathering, decision making, valuation assessment, and portfolio management. Also included are some simple questions for internal review (or for use by allocators vetting an organization), a good list of resources, a short AI history, and a glossary of terms.
While Saguaro is focusing on organizational changes and new possibilities, there are plenty of people trying to go directly to picking stocks with today’s technology. For instance, an Insider article, “A hedge fund manager shares 2 ChatGPT prompts and the AI plugin he used to filter top stock picks.” Elsewhere, Matt Levine took a look at the irony of AI-managed portfolios underperforming an AI-driven market because of light weightings in AI-related stocks — and offered this perspective:
Investing is pattern matching and imaginative leaps, and the AI is bad at imagination.
(Actually, large language models are quite good at imagination in many realms, but so far apparently not regarding investment problems.)
Also, for those that have access to it, the August 14 edition of Pensions & Investment has a set of three articles, plus two opinion pieces (here and here), about the adoption of AI strategies by asset owners and money managers.
Not dead yet
The social media site formerly known as Twitter has been in obvious decline since Elon Musk took over. Most every decision that has been implemented has led to lower engagement and lower morale among those who have found the site to be a source of investment perspective and ideas over the years.
While many good contributors have left, others remain. Here are three updates of interest from the last few days:
~ Fifteen insights from Lee Ainslie, via the Invest Like the Best podcast.
~ Nine sources of advantage, from Shane Parrish of Farnam Street.
~ “Mr. Market” and “Miss Owner-Manager” are fundamentally out of sync. By Andrew Hollingworth, via @borrowed_ideas.
Other reads
“How Many Eggs? How Many Baskets?” Strategic Investment Group.
There is a big difference . . . between the idea that it is hard to find excellent managers and the idea that there are very few excellent managers.
Simply, the more managers an investor can research and evaluate effectively, the more managers can be in the portfolio without giving up performance.
“Intelligent vs. Smart,” Morgan Housel, Collaborative Fund. A wonderful parsing of favorable traits that can help you consider the qualities of the people around you (and of yourself).
“Know What You Own: Your Portfolio Needs New Glasses,” Paul Kenney, Syntax.
Using individual product lines to analyze public equity managers, benchmarks, and portfolios provides investors with an enhanced level of precision, enabling better analysis of investments and embedded business risks.
“Private Credit,” Jennifer Liu, et. al, UBS. A primer on the hottest growth area for institutional investors.
“Macro illusions — which ones are you suffering under?” Tyler Cowen, Marginal Revolution.
I am saying that various doctrines appeared to be “quite true” on a temporary basis, and yes I stress that word temporary. Then they are not true, or at least not obviously true any more.
“What We Talk About When We Talk About Moats,” Todd Wenning, Flyover Stocks. Discussions about economic moats should deal with three questions: the source of a company’s advantage, how to measure it, and whether it is widening or narrowing.
”The future of ESG after the bear market,” CREATE Research.
Three in every five survey participants [comprised of 148 pension plans] believe that ESG investing is not a bull market luxury but a foundational trend.
“Private Equity’s Woes Spur Rise in NAV Loans — And Managers Offering Them,” Alicia McElhaney, Institutional Investor. Also, a follow-up from McElhaney, “Allocators Aren’t Happy With the NAV Lending Craze.”
“The maverick and the status quo,” Seth Godin, Seth’s Blog.
The maverick isn’t the selfish gunslinger of myth. In fact, she’s focused on resilient, useful interactions that change what we expect, pushing back against the inertia of gobbledygook and bureaucracy.
“How to sell an asset manager,” William Robins, Citywire Amplify. “You need a culture fit, an operational fit and incentives to be aligned.”
“Understanding Changes to Non-GAAP Reporting,” Olga Usvyatsky, Calcbench.
Notably, the updated SEC non-GAAP interpretation states that metrics can be misleading even if properly disclosed.
“Identifying and measuring sources of alpha in gender factors,” Christine Cappabianca, Impax Asset Management. A review of studies on board diversity, executive diversity, innovation, and sustainability, plus “a fascinating sub-theme” regarding risk management and accounting practices.
“The Expanded ETF Ecosystem,” Arro Financial Communications.
The goal of this guide is to serve as a comprehensive companion to the expanded ETF ecosystem, encompassing both traditional passive ETFs as well as these new semi-transparent models that are beginning to see the light of day.
“Are ‘Platform’ Teams The Key To VC Success In Down Markets?” Dale Chang, Crunchbase. “A well-constructed platform team as part of a venture capital firm has a positive impact in both up and down markets.”
Evergreen observation
“The single biggest problem in communication is the illusion that it has taken place.” — George Bernard Shaw.
A moment of reckoning?
Two articles from the Financial Times focused on those darlings of the day, multi-manager multi-strategy hedge funds (the subject of a March Investment Ecosystem essay, “Ascendance of the Pod Masters”).
“The Big Read” by Harriet Agnew and Ortenca Aliaj asks, “Are hedge fund pioneers facing the end of a golden era?” According to the authors, the fabulously-successful multi-manager funds are facing “a moment of reckoning” driven by capacity constraints, the escalating war for talent, some (modest) pushback on fees and lockup terms, higher interest rates, regulatory scrutiny, and concerns about whether leverage and crowded trades could precipitate problems at a firm (and perhaps beyond).
An Alphaville piece by Robin Wigglesworth expands on that and offers a number of illustrations from investment bank research reports, including the one that appears above, which shows how asset growth at the pod shops has eclipsed that of the rest of the hedge fund industry of late.
Postings
“Analyzing Internal and External Investment Networks” was brought in front of the paywall for all to see. Check it out.
All of the content published by The Investment Ecosystem is available in the archives.
Thanks for reading. Many happy total returns.
Published: August 28, 2023
To comment, please send an email to editor@investmentecosystem.com. Comments are for the editor and are not viewable by readers.