Review: Drobney’s “The Invisible Hands”

I haven’t quite gotten used to reading on the iPad just yet, preferring the feel of a book in my hand despite spending at least an hour on the iPad scanning Flipboard and the like each day. With that backdrop, I finally finished the first book I loaded onto the iPad about 18 months ago – which is Steven Drobny’s 2010 book: The Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes, and Real Money

If you are a pension fund or endowment investment manager, this is a must-read. The key concept of the book is the concept of “real money,” which Drobny explains as the money institutional firms like pensions and endowments access to do real things with (like pay out benefits and build classrooms and pay the electric bill).  They invest that real money in stocks, bonds, and more recently hedge funds – and therein lies a problem which Drobny explores. His view is that those in charge of investments for such “real money” shouldn’t just be looking for the best performance regardless of risk and ignorant of liquidity and correlation with the general market and economic cycles (hardly a novel idea, but one which was surprisingly ignored up to the 2008 crisis).

The investment should be tailored to what the real money needs are, not the other way around with the performance of the investment dictating what can be done with the real money.

He explains the issue well in a TradingMarkets.com interview

“… What got me interested was that, post-2008, when these funds lost a staggering amount of money, and it started to effect the underlying entities they were set up to support.”

“So for example university endowments lost so much money that the actual university had to fire people, turn down the thermostats, cut financial aid, etc. In Boston, Harvard had to stop construction projects.”

“And then in the pension world, you saw forced selling of privates, you saw the contributions provided by states and municipal entities increase, which caused them to cut teachers, cut police, cut firefighters. So all of a sudden you had the tail wagging the dog, just because of investment performance.”

Drobny goes on to highlight (anonymously) some global macro managers who did well during the 2008 crisis, and without explicitly doing so makes a good case for managed futures with their liquidity and crisis period performance, by criticizing the move of the real money crowd into illiquid, stock market mimicking private equity funds.

As an aside – I was actually chatting up the President of my wife’s college about it a few weeks ago. I was telling her about the book and the lesson to avoid the liquidity trap –  which infamously befell endowments during the 2008 crisis because they were all heavily invested in private equity and hedge funds (which proved to be a lot more correlated to stock prices than they had previously appeared to be).

She had an interesting insight – that liquidity for a college endowment isn’t as simple a concept as it may seem, because much of the money given to such endowments comes with strings attached. Rich Aunt Jenny may give a few million which is to only be used to fund scholarships for budding botanists, for example. Or perhaps Grandpa Joe may donate his millions specifying they only be used to build a new philosophy wing in his name.  The point is, a lot of the money in an endowment is earmarked in one way or another – making it difficult to simply move money around to where it is needed. This little inside info on the inner workings of endowments just makes the point that much stronger – that endowments are real money funds, which need access to that money on a regular basis; meaning loading up on illiquid investments might not match your plans.

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.