Outsource that SH*T

Alternative Investments are nearly Mainstream. It took a couple decades, but there are more ways to access hedge funds and strategies like Managed Futures than ever before. They are so mainstream, in fact, that there’s a bit of a movement among some family offices to internalize some of these alternative investment strategies (especially private equity). Here’s Ben Carlson of A Wealth of Common Sense quipping about the phenomenon:

Who wouldn’t want to earn double-digit returns without having to pay large fees to an outside money manager? That’s part of the allure of the family office.

Yes, there are more ways to access alternative investment return streams these days, including, it seems – just doing it yourself via a couple of private equity guys or girls in the corner of your shop (or building your own algos). But access doesn’t mean success, much like the way the Cheesecake Factory’s 1000s of item menu doesn’t equal culinary greatness.  Here’s Carlson again explaining why this may be problematic in his post highlighting the issues Family Offices face when investing in Alternative Investments:

The problem here is that most family offices are woefully understaffed for this type of strategy. If the average operation has just three investment staffers, with just two to oversee internal private equity efforts, that’s inadequate for all but the very best private investors in the world.

Private equity is not a strategy you can run passively. It takes a massive amount of work. Plus you have to know your competition. The biggest private equity firms look at thousands of deals a year. They have specialists who handle deal sourcing, banking, financing, operations and more. Cutting out these firms and their huge fees does sound appealing until you realize how hard it can be to beat them at their own game. The competition in this space has never been greater.

Not only do you have to gain access to, and choose, the right deals, but you also have to monitor and help improve these companies once you buy them. This is operationally inefficient, to say the least.

The due diligence is just the first step. Implementation and monitoring can be even more time consuming and confusing for those who aren’t experts in the field.

We’re insanely biased in this regard, of course, as our business revolves around assisting investors just like the family offices mentioned by Carlson in accessing alternative investment managers that fit their risk/reward profiles and mandates.  But we couldn’t agree more when it comes to our specific slice of the alternative investment space – managed futures and global macro investments. As Carlson says, are you really staffed up enough to do this type of due diligence? Can people on your team see the VIX future curve in their head, as we joke about on in our new VIX Trading Infographic? Do you have risk systems, attribution reporting, backtesting software? Execution algorithms? Who will you benchmark against?

All of this is to say nothing of the technology, compliance, and built-in biases with running your own strategy (won’t it be harder to fire those two guys in the corner?).

There’s surely family offices, fund of funds, and other institutional investors well versed in many sides of managed futures and global macros (sides like these and intricacies like these) – but they are few and far between. And what if you have special needs? A desire for machine learning programs, or day trading commodity managers, or volatility hedges?  It takes a special kind of shop to have the bandwidth and enterprise-wide knowledge to know what they are looking at when evaluating talent across such a broad swatch of strategy types.  Yes, there are smart people out there who can quickly get up to speed. But at what opportunity cost?  Does it make sense to spend 50% of your time learning about something which will be 10% of your portfolio? Probably not.

And the real kicker… a group like RCM doesn’t charge anything for this expertise, instead earning their keep from the futures clearing and manager fees you pay anyway.

So go ahead and do what you will with Private Equity. But managed futures or global macro? Outsource that S^&$. It will be more efficient, and more cost effective in the long run.

One comment

  1. […] Building an Alts portfolio is no small task, and at the end of the day – we recommend, as we crudely put it in a post a few years ago, to Outsource that S*&4. […]

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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.

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