Novus Soap Box: I Wish Novus Were Here [4 of 4]
Health and wealth are worth protecting—in that order. In today's narrative, we explore the peace of mind that accompanies adequate preparation.
This is the fourth episode of a series on what’s wrong with the investment industry today. View the previous installment.
Like all of you, we’re taking COVID-19 very seriously, and we at Novus have taken steps to protect everyone’s wellbeing. Since Monday March 9th, our four offices are working from home and we have cancelled all travels and client visits, transforming them into remote video conferences.
I am pleased to report that business runs as usual and that we haven’t had any forms of slow-down, discontinuity, or hiccups in the process. We’re lucky, compared to other industries, in that our product is digital in nature.
Health and wealth are worth protecting—and in that order. We’ve taken all precautions on the former, playing our part in the global fight against the pandemic. Assuming you’ve done the same, let us know when you’re ready to think about protecting wealth.
Note: If you would like information on how popular hedge fund names are currently faring after this week, please see this quantitative analysis, published today.
Maybe it's all a bad dream
The World Health Organization (WHO) announced this morning, on the 13th of March 2020, that COVID-19 was responsible for at least 4,955 deaths, that the number of cases outside China has increased 13-fold in the past two weeks, and that the number of affected countries tripled during the same.
Meanwhile, markets are in a free fall. We haven’t seen anything like it since the financial crisis. Liquidity is quickly drying up, the VIX is hovering at levels not reached since the Lehman collapse.
You are the CIO of a university endowment. Within a few hours, your equity portfolio may go from up 5% to down 5%, which is twice the rate of your yearly disbursements at the portfolio level.
How are my managers doing? you wonder. What’s my exposure to airlines, do I have hedges? What about my exposure to China? How much of that do I have in my emerging markets allocation? Are my managers hedging? If not, should I? Let me ask Joe, my junior ops, he maintains our exposure spreadsheets.
You do not see him at his desk. You call Charlotte at x3154. Charlotte is your Chief Operating Officer, and Joe’s boss. The phone rings on and on, you wait for voicemail, but none has been set up. You hang up. You call Avery, your head of HR. You start tapping your pencil, lightly at first, with more vigor then. The phone keeps ringing. Perhaps a bit too much vigor, as the pencil succumbs to your hard tapping and cracks open. You’re about to smash the receiver onto its cradle when you hear Avery’s voice. “Avery! Where’s Joe, where’s Charlotte?”
“They’re both home, they were coughing yesterday, and we asked them to self-quarantine and work from home. Remember?” Of course, you do. Funny how you had forgotten. Perhaps too much coffee.
Silvia then, that’s it! When she interned with us last summer, she spent some time configuring Charlotte’s spreadsheets. Yes, I remember, wow, good memory after all. I thought I had a senior moment but I’m still capable of a few strokes of genius. You walk down the corridor. There she is. Silvia turns around, and before you speak, you realize by the look of her face, tense and disappointed, that she’s already tried to update Charlotte’s spreadsheets, to no avail. There’s no need to explain what you’re after, she knows what you want.
“Boss, I can’t make it work, most of the links are broken, I think it’s got to do with 2020 being a leap year; those broken links are pointing to a missing day. Also, about half of the mangers' data were not updated. I'm afraid it's beyond me, now I have a few circular references that have stalled the whole thing. I’ve been trying to fix them since this morning, and I can’t seem to…”
The hell with it. “Avery, drop the spreadsheets, call all the managers and get them on the line right now!” The office around you falls silent. Keyboard tapping comes to a halt. You feel everyone’s eyes on you. Perhaps you’ve yelled a little too much. You keep your eyes down as you make long strides back into your office. You shut the door, drop into your chair, turn around, and start munching on the long half of a broken pencil. You look out the window, and you keep wondering… China, airlines, hedges, China, airlines, hedges, China…
You turn the chair back towards your desk with a swift movement, perhaps rotating quickly will jerk the demons out of your head. You look at the Bloomberg screen. Intraday candle charts, your favorite. Then daily, rolling 5 day. Each day a gap down. After a few hours, you realize it’s been a few hours. You jump up while looking at the new price ticks flickering on the screen and head towards Avery to check in. You lift your head and freeze. Avery is right in front you, and clearly freaked you out. How long has Avery been here for? you wonder.
“Boss, I’ve tried everything, phone calls, emails, even Bloomberg chat. No one's around.”
The phone rings. Once, twice, thrice. You’re still staring at Avery. Avery’s eyes move towards the telephone and back towards you. You don’t say a word, you dismiss Avery with a wave, and pick up. “Yeeeees?” Who dares calling me at this time of the day, don’t they see what’s going on? you mumble to yourself.
It’s John, Chairman of the Board of Trustees. John is man of few words, professor Emeritus in Psychology, and best-selling author of a few seminal books on behavioral biases. Every time you speak with him, you like feel he’s in your mind, looking around, discerning your inner workings in a way that is somehow clearer than you ever would be able to. Certainly today. And today you most definitely don’t want him inside your brain. I knew it, he’s asking about a performance estimate. You loosen your collar. You feel a thin layer of sweat emerge through your skin. “Well John, it’s kind of hard to say…” The sweat cools on your skin, it all feels so real…
You jolt upright out of bed, eyes wide open into the pale colors of an early morning in March. You feel the sweat on your chest.
“Is everything ok honey?” mumbles your spouse. A caring, re-assuring hand lands softly on your shoulder. “Yes, just a bad dream. It’s still early, you can sleep some more.” You move your spouse’s hand back onto the cover, as gently as it was placed on you. You pull on a robe, take out your iPad, and log into Novus.
Using Best Available, your Novus coverage team has digitized top positions as reported by every manager, combined them with public data, and scaled them up with their right net / gross exposures and aggregate sector, geography, and market cap totals. De facto, they’ve transformed an imperfect mosaic of information into an optimized position-level proxy for your hedge fund portfolio. Then, they’ve enabled P&L simulation to give you daily performance estimates.
Novus also integrated all your managed account data and treasury book, giving you a full picture of your university endowment. You click through performance and contribution by node. Markets were down 10% yesterday. Click. Novus estimates you’re up 2%. Click. Your hedge fund portfolio detracted 2%, long only another 5%, but the put hedges in the treasury book yielded 9%. Click. Of that, 60% of which is vol effect, the balance is delta. You can’t wait to call John, but head to savor your warm coffee first.
The title of this piece was inspired by Pink Floyd’s “Wish you were here,” from the homonymous album released in 1975. A strong departure from the psychedelic guitar odysseys of their style at the time, the song is melodic yet hard to whistle, and pure in its lyrical simplicity.
Just like the reassuring statement “wish you were here” clears up a lot of the existential questions asked elsewhere in the song’s text, Novus can clear up most of the questions you have about your portfolio at any given time, with precision and accuracy. And most importantly, without unnecessary drama. While I enjoy the nostalgic experience of hearing a record that’s almost half a century old play on my record player, I don’t quite understand how decisions affecting billions of dollars (some of which could be ultimately used to fund the COVID-19 vaccine) are made on a refined version of Lotus 123, a less poetic vintage object of the last millennium.
Health first, everyone, then wealth. Secure the wellbeing of yourself and those around you. Then, let us help you with the latter.
View Part 1 of this series, Desperately Seeking Investment Skill Set
View Part 2 of this series, Condemnation of In-house Data and Analytics
View Part 3 of this series, Also Sprach ESG (2020: A Fiduciary Odyssey)