Ep 24. The Long-Short | ICYMI, Q1 2022 round-up

Published: 20 April 2022

The Long-Short is a new podcast by the Alternative Investment Management Association, focusing on the very latest insights on hedge funds and private credit.

Each episode will examine topical areas of interest from across the alternative investment universe with news, views and analysis delivered by AIMA’s global team, as well as a host of industry experts.

Another opportunity to listen to some of the remarks made by guests that joined the Long Short over the past three months. Guests that feature in this special episode include, Bill Kelly CEO and President of CAIA, Robyn Grew, COO of Man Group, global fintech and crypto consultant Henri Arslanian and Henry Neville of Man Group. The Long-Short will return with a set of fresh new episodes next week.

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Read the transcript:

0.01-1:24 Tom Kehoe

Hello and welcome to the Long-Short, a new podcast brought to you by AIMA the Alternative Investment Management Association, focusing on the very latest insights on hedge funds and private credit. My name is Tom Kehoe. AIMA is the global representative of the Alternative Investment Industry with around 2,000 corporate members spread across 60 countries. Of these, our fund manager members account for approximately two and a half trillion dollars in hedge fund and private credit assets. Each weekly episode of the Long-Short will examine topical areas of interest from across the alternative investment universe with news views and analysis delivered by AIMA’s global team, as well as a host of industry experts. So, whether you're a hedge fund or private credit industry veteran, a student of the industry, or just someone interested in learning more about hedge funds and private credit, this podcast will be your ideal companion to help navigate you through the long and short of this fascinating industry.

Hello, and welcome to this special edition of the Long-Short. We hope you're doing well at this time. Since the beginning of this year, 5000 of you have listened to the Long-Short with a growing number of subscribers doing so every week. Many thanks to all of you for your support - we are truly humbled. And next week will see the return of fresh new episodes of the Long-Short, and we look forward to having these drop.

1:24 Drew Nicol 

But in the meantime, our fantastic producer of the Long-Short, Caterina Giordo has put together a very special episode that offers a roundup of some of the most listened to podcast episodes since the beginning of the year. To date, we've heard the latest views on crypto assets from prominent market insiders, why hedge funds are entering the trade finance market, how inflation is impacting the everyday person, and what we should be investing in to counter high inflation. We've also spoken to Robyn Grew COO of Man Group who offered her views on the importance of D E and I and Bill Kelly, CEO and President of CAIA, o spoke to us about the importance of educating the world about alternative investments.

2:02 Tom Kehoe 

We do hope you enjoy these reposts and we look forward to speaking to you again on the Long-Short next week.

Intro ends

2:12 Tom Kehoe

Just thinking about the crypto assets and the performance of crypto assets over the past year, I guess when people talk about cryptocurrency most people will recognise Bitcoin and arguably that, was really much where all the talk was about last year was around Bitcoin and the performance of Bitcoin. This year, I've noticed commentators are talking a lot about the merits of Ethereum. What do you think is likely to be the cryptocurrency that everyone's going to be talking about, say 12 months from now? Is it going to be Bitcoin? Is it going to be Ethereum or is it going to be something else?

2:52 Henri Arslanian (PwC)

It’s a good question, Tom. Obviously, bitcoin is by far the biggest crypto asset out there followed by Ethereum. I think 2022 will be a very critical year for Ethereum. I would argue it's a make or break year for Ethereum. To put in perspective in the past year in 2021 catalysed by the push towards Ethereum 2.0, and also some changes that happened to Ethereum. One of them EIP 1559, which had made changes to the burn records in Ethereum, the price went from all the way from $750 to $4,800 at its peak, but there's obviously some downsides with Ethereum. One of them are its gas fees. Last year, for example, the gas fees varied from all the way from $4 to all the way to $70 for a single transaction, which makes the Ethereum transaction way more expensive than the legacy banking infrastructure for example. The big difference though, now Tom is unlike in previous years, there are other platforms, what we call Layer One solutions in the market that exist. Anything from from Algorand and Avalanche to Tezos and Solana and many, many, many others.

And I think what's going to be interesting is that, unless Ethereum is able to really get itself onto the roadmap pretty quickly and make sure it's delivers on the changes that it promises, I think we may see the patience that a lot of the crypto ecosystem has had, and that a lot of developers have had,  start shifting towards some of the other platforms. Still Ethereum is by far the dominant player. I mean to give you one example, when it comes to Non Fungible Tokens (NFTs), over 90% of them are happening right now on the Ethereum blockchain.  What I'll be watching for the year to come is really some of these other Layer One solutions. are many of them that are getting traction, like the ones I mentioned Avalanche, Algorand, Tezos and Solana who really have interesting value propositions, not only on the speed perspective, not only on the scalability perspective, but also on the fee perspective. And that is a big thing to watch from a 2022 perspective.

5:04 Drew Nicol

We just had the one-year anniversary of GameStop, which was obviously, you know, caught fire and caught the media attention by storm a year ago. And what we're seeing on the tail end of that is really, you know, as a consequence of the lock downs, and maybe people turning to day trading as a way to supplement their incomes, we now have a generation of people who have entered the stock market in their millions that might otherwise not have. But where this change is from previous generations when you may have a situation where someone buys a bond when their child is born, or that person purchases its first shares in the company that they go on to work in; now we've got a generation of young people who arguably have no concept of  an investment  in something like wine or fine art being used as an asset class, and maybe have never owned a share in a company either, but are trading NF TS or are involved in the crypto space. And so, in some ways, the next generation of day traders in the retail market are more comfortable trading assets in the alt space than in traditional markets. That's fascinating from the point of view of, you know, raising awareness and opening a window into having a greater understanding of the broad universe of alternative investments. Do you see this as an opportunity in that space? And as you say, it may well be the future anyway.

6:35 Bill Kelly (CEO & President, CAIA Association)

Yeah, so there's a lot there, Drew. I think it's, it's maybe a little bit of a blessing, but with very strong flashing yellow light. The blessing part is that I think the Robin Hood's and the GameStop, and gamification, and COVID, have all conspired to get a lot of folks involved in this market that never naturally would have. And I think we should embrace that, because I think that you got to be in the game to understand it.

But then I do worry about the intersection of investing in gamification. And I don't remember exactly what the fad was when I was growing up. But maybe it was a type of jeans or sneakers, or an eight-track cassette that you were willing to pay up for. And that established so your street cred. Now street cred is happening in the Metaverse, and if somebody wants to go and buy something, to dress up their avatar, because that's sort of their modern day have an eight track cassette thing. I'm 100% fine with that, and I totally get it. But the moment they start confusing that with investing, you've crossed a bit of a Rubicon, and I think you've got to understand what that means. And two cases I'll cite one is just about a year or so ago, I think it's about this time. And in 21, there was an artist named Beeple, who's still alive, and somebody created this big compilation of all his works and sold it as the NFT through Sothebys. And if you add up all the valuations, and I think it was a big holder in Singapore, it came out to be somewhere around $69 million. And I’m like, “Oh, my God, the NFT has arrived”! I use this as a punch line for a lot of public speaking, I do.

If you go and look at Beeple that value that NFT is driven by a security token called B20. And if you look at the B20 security token in March of last year, at the height of the $69 million trade, it was trading around $26- $27 A unit. If you go out and look at that today, and any of your listeners can Google and I think even if somebody listens to this a year from now, it's gonna be unchanged. That NF T is tracking at less than a buck. And it's been flatlined for the last several quarters. So, it peaked in March 21 and went straight down and has been submerged at 75 cents. So now if I bought a piece of that because I wanted to brag about it and dress my avatar up, then homerun. But if I put 20% of my 401k in there, I'm screwed.

So that's one point. And then secondly, Tom, you probably saw my letter to my members. I referenced this the elephant in the room., So my son Will got this Oculus headset for Christmas. And he's asked me to “try it on” and I eventually did and typical of old people taking on new technology. I get so wrapped up in the realness of it that I fell over. I thought I had a concussion. But it led to a whole discussion on this. And the other point I was going to raise is that in a Metaverse called Sandbox, somebody recently paid $650,000 for a virtual yacht. And as a former boat owner, myself as the old saying goes, the two best days in a boat owners’ life is the day the boat owner buys the boat and the day he sells it. 100% true as a boat owner in the real world. So, in the Metaverse, no doubt that that person was very proud to write a real $650,000 check. I just hope he doesn't get Beepled on the back end when he finds that NFT is below water along with his savings and virtual yacht.

10:18 Drew Nicol

We've successfully outlined the problem, buying power is down across the board. So, let's talk about remedies from a retail perspective point of view. Where should people really be putting their money during these periods of higher inflation?

10:27 Henry Neville (Man Group)

Okay, so I'll have to disappoint you a little bit here, because I'll get in trouble with my compliance department if I start giving investment advice. So, I'm not going to do that. But what I can do is tell you what has factually performed well historically in inflationary regimes. Now, as I say, we wrote this big paper with Professor Cam Harvey's a storied academic out in America on historic inflation regimes looking back over the past 100 years across the US, UK, and Japan. And, this has had a number of findings, but I'll just point to three things that we found have consistently worked really well during an inflation regime.

And the first is commodities. In a way you would expect that because commodities go into the goods that make up the CPI basket, but the extent of that positive performance did surprise us. So, in the eight US inflation regimes, commodities in aggregate, so this is everything from metals to energies to wheat, etc run at a 14% real CAGR so CAGR adjusting for inflation, with a 100% hit rate. Now within commodities, industrials and energies, segments performed best, and anything you can eat for agricultural and livestock etc. Still good but slightly worse, and that we think is politicians learning the lesson from Mary Antoinette, “don't mess with food prices, if you want to keep your head metaphorically speaking”, we hope. Second thing again, kind of obvious, but good to have the numbers on it. Tips or Inflation Protected Bonds also perform pretty well. I mean, not they're not going to knock the lights up, but they're going to give you about 2% Real annualised. We do need to make the point this time around, though that the TIPS yields today, 10 year tips yield is deeply negative as a starting point in this inflationary regime as was not the case, historically. So, we just need to adjust for that in our thinking, will it provide the same level of protection today as it has historically?

And finally, the final thing is trend strategies across all segments of the market. So we constructed a trend strategy which goes across bonds, FX, equities and commodities at a 15% volatility, so quite high volatility, that gives you a real CAGR of 25%, again, with 100% positive hit rate across the eight regimes that we identified in the US and the qualitative rationale, we think behind those empirical results for trend because I know you'll  probably be thinking, “you would say that your Man Group, you know, you love trend, the man with a hammer, every problem looks like a nail”. But it does have a qualitative backing as well as empirical evidence, which is that we find that in an inflation regime, it is a volatile time for anyone at one security and one asset class individually, but the patterns that we see in an inflation regime do tend to persist. So, for instance, seeing within commodities, seeing industrial metals outperforming agricultural commodities, there tends to be not much volatility in terms of that relationship moving through the inflation regime and inflation regimes tend to be relatively long, so almost two years on average, and most trend strategies, their look back is 12 months or so, so that there's that time for those patterns to emerge. So those are three things which historically perform relatively well in inflationary regimes.


14:27 Yasmin Bou Hamze, AIMA

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Interlude ends

15:23 Drew Nicol

And you mentioned data there. And I think it's a key part of the issue that ESG or or the key phase in the evolution of ESG in our industry of having that data come through it not just because we simply weren't making it, we weren't creating datasets around these issues in the past, and this goes across the E, the S and the G. And so that is something that is an evolving and an ongoing issue for many firms in many ways. And as you say, it is really important to be able to hold yourself to account and have those KPIs, but at the same time, not sort of making yourself a hostage to fortune in the sense. And we did some work last year around this. And we spoke to several recruiters who were describing how they were told, you know, this is our strategy for improving diversity, please, can you bring us X Y, Z candidates, we really want to broaden our search. And they were coming back and saying, you know, we were struggling, or we can’t, and they were saying, “well, we have this standard we must keep”. And so, it was about creating reasonable milestones for change that are not lax, and you're not letting yourself off the hook as a firm, but at the same time not setting something up that will inevitably come back to bite you.

So, in terms of how Man Group is approaching this, I know you guys love data more than most. So how are you guys approaching this? Could you give us just a little flavour of, you know, where you do see some hard lines that can be set?

16:58 Robyn Grew (COO, Man Group)

Yes, Drew. I think you're spot on. I think that data and metrics enables all of us to hold ourselves accountable on progress. I think it's a progress piece. That is important. It’s a journey that we're on. And absolutes are important. You know, it's not that you can set some unattainable goal and say, Yeah, but we are trying to move a little bit towards it, I think you've got to try and push for the reality of your metrics to say this is what we are aiming to. And if we don't achieve our targets, I think we have to understand why we haven't achieved targets. So, I think there is a discussion there. As you know, Man Group have signed the Women in Finance charter setting a target for the number of women in senior management. It was 25% in 2020, which we reached it's 27.5% by the end of 2022. And it's 30%, by the end of 2024 - we're at 26% right now, you see we do know our data. The types of goals that year, these types of goals show, not just the outside world, they show the inside world, our employees that were committed to change. And when you think about that, if you add that commitment into initiatives and programmes, we can create a workplace where our diverse staff can see the journey for themselves. We're transparent about the journey that we're transparent about the hurdles, were transparent about why it is we can succeed in some areas more easily than others.

Those metrics and goals are indicative of a journey. And it means we have to talk about it. We talk about it in the in a qualitative sense, but we talk about it in a quantitative sense. And that as asset managers is our bread and butter. We talk about numbers all day long. We shouldn't avoid numbers here. We just have to be realistic. But we have to push ourselves. I have to say we as asset managers pride ourselves on solving really difficult questions and queries and investment solutions for our clients. That's what we are here to do. And we have really, really smart and clever driven people doing that. And if we can achieve answers and solutions for our clients in the investment world. This is another set of problems that we can achieve, somehow solutions for. I cannot believe that with the amount of quality individuals that we have in financial services and in asset management. We can't make an impact here. We do so at Man Group, and I think we should as a broader industry group too.

19:55 Tom Kehoe

Freddie, your report notes that hedge funds are entering the venture capital arena, at earlier stages, can you explain to our listeners why that is, and how it might help businesses looking for that early capital?

20:12 Freddie Parker (Goldman Sachs)

The first thing to say is I do think most of the activity has been focused on the later stage within VC. If you think of this in terms of funding rounds, it probably means round C, round D, and later. What we have seen, I think, is this concept of crossover investing being particularly powerful. And I talked about some of those dynamics around the late stage private versus public market valuation discrepancy. So, I think that's been a lot of what's driven the sort of the first forays of hedge funds into private markets. But what we have seen, I think, is, as funds have done more private market investments, and they've increased their comfort level investing in privates, they've grown their footprint and their brand and reputation in the space, we have observed a tendency for some funds to push earlier and say, “let's look at the series B, let's look at Series A, and expand our remit through time”. From a business's point of view, hedge funds can be a pretty appealing capital partner. And I think they have some aspects of differentiation versus the traditional private market investor base. One is capital duration, which is to say, traditional private markets, investors, VC, PE, growth equity funds, generally speaking, are structurally required to exit their position once the company goes public. So maybe there's a sort of post IPO lockup period, but after that, generally speaking, what they'd be looking to do is return their capital to investors, so sell out of the position. Hedge funds have the flexibility to be able to continue to hold those businesses through the IPO and into the public markets. So, part of it is the appeal of having investors who are going to invest in private rounds, but perhaps invest more at the IPO and then stay with you through the public market phase of a business's life, which obviously provides a degree of stability to the shareholder roster, which is which is appealing.

22:16 Tom Kehoe

So, reinforcing that view regarding how hedge funds are becoming more partners in this area – deepening that alignment with investors.

22:28 Freddie Parker

Yes, absolutely. There's a couple of other dimensions as well. One I would say is just the nature of ownership that hedge funds are looking for, which is generally more passive actually. So, hedge funds tell us, “We’re not looking to take board seats in a way that a VC firm would, we're not looking to impose upon the business, our view on how they should run their company, but we're happy to invest with them, and really sort of leave them to it”. So particularly for companies that have already taken VC funding and maybe have granted some external investors seats on the board, then the fact that hedge funds are happy to be passive holders I think is appealing. But at the same time, I think hedge funds are also still happy to lend expertise where necessary, and often as not I think that comes in the form of helping to almost coach and provide advice to companies on the transition from being a successful business in the private markets to being a successful business on the public markets. And hedge funds, I think would argue that as long standing successful public markets investors, they are able to share insights into how public companies should be looking to engage with their investor bases in the most successful ways. help these companies understand what are the ratios that public markets investors are going to be most focused on? How should you be presenting yourself as a business to the public markets as distinct from when you were a private company?

24:04 Drew Nicol, closing

The Long-Short was brought to you by AIMA, the Alternative Investment Management Association, the global representative for the Alternative Investment Industry. As always, you can get the latest episodes by subscribing to the Long-Short on Spotify, Apple podcasts and Google podcasts, or by streaming episodes directly from our website. Thanks for listening.

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