"I’m bullish on active management, but I think that you need a correction for people to remember why hedge funds exist in the first place."
Meb Faber recently interviewed Novus co-founder and Chief Research Officer Stan Altshuller. The episode was originally published on mebfaber.com, and the following summary is also from The Meb Faber Show, used here with permission.
Summary of Episode:
In Episode 113, we welcome entrepreneur and hedge fund expert, Stan Altshuller. Meb starts by asking Stan to give us his backstory, and how he came to co-found Novus Partners.
After Stan gives us his origin story, Meb asks about Stan’s broad approach to the markets. Stan tells us that at Novus, they start with data. This data encompasses everything from public data from regulatory filings, to private data from daily holdings reports. They bring it into an accessible, searchable database. Then engineers and programmers write various algorithms that capture and present the details of that data. This helps identify takeaways such as where the risks might be in a portfolio, and how various portfolios compare to others.
Meb asks about common takeaways from all this analysis. Stan points toward “diworsification.” As the name implies, too many investors have far too many holdings in their portfolio – from a diversification perspective, more than is needed or helpful. Stan tells us that 12 different investments is as beneficial as 100. Another takeaway Stan points toward is “conviction.” Are you truly adding value to your portfolio given your weighting decisions? Meb notes how you have to have greater position concentration to make a real difference in your portfolio. He then asks how Stan measures conviction.
Stan tells us that conviction can mean different things. For equities, the highest ROI comes from stocks with a 7.5% position or higher. But if your portfolio is highly diversified, you’re unlikely to have a single position of this size. Stan adds that, for an allocator, the threshold is about 5%.
Next, Meb asks about the state of active management. With so many headlines about flows going into passive, what are Stan’s thoughts?
Stan gives us a great synopsis, covering “dispersion” and “correlation.” The presence, or lack thereof, of these market characteristics can have much to do with the success of active managers. Overall, Stan says conditions are now setting up such that we’re seeing alpha being generated in the hedge fund space again. He tells us “I’m bullish on active management, but I think that you need a correction for people to remember why hedge funds exist in the first place.”
Meb asks about Stan’s process – what analytics help identify the good funds, what they look for, the red herrings… Stan says the first thing to do is ask whether the manager is telling you the same thing as what the data is telling you. You’re basically double-checking the manager’s stated skill set. Next, analyze whether the manager is truly going to add value to a portfolio. For instance, if you add another manager, how much diversification benefit will t actually provide? If not much, do you really want to pay their fee? Then you look at whether the manager is still generating alpha. Has there been style drift? Is he/she managing significantly more money now than in past years?
Meb hones in on one part of Stan’s comments – “performance as a metric.” This is a great part of the interview in which Stan really draws out the point that looking at performance alone isn’t necessarily all that helpful. You need to understand how a manager created his alpha. Unless you understand that, you’re a duck in the water. You cannot invest based on performance alone.
There’s so much more in this great interview: What percentage of managers are really adding value with their short book… Stan’s take on whether hedge fund managers truly deserve their fees… When is it time to give up on a manager if performance has been lagging… A major risk in today’s hedge fund space… And Stan’s most memorable trade…
This one involves Amazon and Google. Listen to Episode 113 for all the details.
Topics in the Episode:
- 0:50 – Welcome and Stan’s origin story in the finance world
- 5:28 – Broad approach at Novus
- 7:36 – What are some trends Stan is seeing
- 11:33 – How Stan manages the convictions of managers
- 16:11 – Trends in active management and asset management
- 22:22 – The universe of hedge funds Stan covers
- 23:55 – Analytics and processes that helps Stan evaluate funds
- 28:48 – Hedge fund performance as a metric
- 32:24 – What percentage of hedge fund managers are generating alpha
- 35:29 – Do any managers truly excel at short selling
- 38:04 – What is the criteria for letting a manager go
- 41:24 – Is it common for fund managers to change their styles as they grow
- 43:01 – Managers shifting to quant funds
- 45:04 – Major risk in quantitative data
- 47:46 – Is it a bad idea to go long the funds that are most popular
- 49:29 – “The Madness of the Masses and Wisdom of the Crowd” – Hamann
- 49:52 – The Best Investment Writing: Selected writing from leading investors and authors – Faber
- 49:56 – Invest with the House – Faber
- 52:30 – What is on the horizon for Novus/Stan
- 55:24 – Most memorable investment or trade
- 57:21 – Follow Stan – Website blog and on twitter @saltshuller