In Case You Missed It – Around the World with Yusko
Below is a summary of the latest webinar from Mark Yusko, CEO and CIO of Morgan Creek Capital Management, LLC and Portfolio Manager of the AdvisorShares Morgan Creek Global Tactical ETF (NYSE Arca: GTAA).
“A.W. Jones Was Right: Time to Get Hedged”
October 29, 2015
Hedge fund apologetics, not apologies, came through the microphone loud and clear during Mark Yusko’s monthly webinar the Thursday before last (watch it here). Preparing his defense of the doctrine, Morgan Creek’s CEO and CIO began the presentation at the genesis of the industry with Alfred Winslow Jones. “Hedging was a speculative tool used for conservative purposes. Without it, I would not have been able to sleep so well at night,” said Jones, who pioneered the strategy in the late 1940s.1 The Jones method of hedging risk to minimize volatility, according to Yusko, is the most direct way to attain outsized returns, and those managers who are not hedged, but simply levered long, will ride the market tides up . . . and down. Utilizing graphics depicting the dispersion of returns and the dampening impact of losses, Yusko illustrated how mitigating large losses liberates the gains to take care of themselves.
Having established the legacy and introductory benefits of the strategy, Yusko moved deeper into his argument by isolating the heart of the word itself. Pulling away the bookends from the letters E-D-G-E, he explained the superiority of hedged investing. Noting the final “d” which Jones originally included in his “hedged” fund,2 he also took the opportunity to add a nod to his trending Twitter hashtag #Edge, which can be followed on the @MarkYusko handle. The true edge in hedge funds has two components – structural and tactical. The structural edge is derived from the ability to take advantage of both long and short positions, allowing skilled managers to profit in different environments instead of constraining themselves to benchmarks. The tactical edge comes from longer experience and specialization of such managers. The game, however, has changed since the founding days of Jones, and even since the development periods of Soros, Steinhardt, and Robertson. The advantage no longer lies in pure access to information, but within the superior filtering and synthesis processes by top-tier managers. “We are drowning in information, but starved for knowledge,” said Yusko, quoting John Naisbitt’s Megatrends.
In conjunction with a host of economic and financial market indicators, Yusko’s straight talk suggested the possibility of an imminent “recession-esque” market downturn similar to 2000 (“2000 2.0”), and supported the need for “meaningful protection” through long/short strategies. However, the strategy itself is not sufficient, the manager matters. As Jones noted in his 1968 interview with the Institutional Investor, “Some people are not congenitally equipped to sell short. It goes against their psychological makeup. People who learn how to sell short seem to have better judgement on what stocks to buy.”3 This observation is supported by the 480% gap in returns between hedge fund managers in the top 5th percentile and those in the middle 50th percentile.4
Divulging a few of his own target opportunities in global equity, Yusko pointed to Japan and the transition of the Chinese economy. A weaker Japanese currency hurts those companies suffering from increased wages but helps financials and exporters. As China shifts away from Fixed Asset Investment (FAI), as discussed in September’s webinar (watch it here), Yusko likes shorts among manufacturers and longs among consumer-oriented companies. He listed five areas of interest for long/short investment in China that he believes will be lucrative moving forward: Retail, Alternative Energy, E-Commerce, Healthcare, and Staples. Returning stateside as he closed, Yusko recommended that investors take another look at the commodity cycle and Oil & Gas MLP’s. There may be some really good assets floating in the “oily bathwater,” as volumes are setting records but prices are getting beaten down. At the end of the day, hedging allows for balanced risk, lower portfolio volatility, and protection of capital for the long term.
If you would like to participate in this month’s Around the World with Yusko webinar, “Unintended Consequences: Saudi’s Thanksgiving Day Turkey,” please register here.
1 “Alfred Winslow Jones: The Long and Short of the Founding Father,” The Institutional Investor, August 1968.
2 “The Jones Nobody Keeps Up With,” Fortune, April 1966.
3 Institutional Investor, August 1968
4 Morgan Stanley Prime Brokerage: Investor Letters. Slide included in the follow up call to the Around the World with Yusko presentation, which specifically concentrated on the Morgan Creek Global Equity Long/Short Institutional Fund. See it here.
Notes and Disclaimers: Please note this material reflects the opinions of Mr. Mark Yusko at the time it was written and is subject to change.
General: This is neither an offer to sell nor a solicitation of an offer to buy interests in any investment fund managed by Morgan Creek Capital Management, LLC or its affiliates, nor shall there be any sale of securities in any state or jurisdiction in which such offer or solicitation or sale would be unlawful prior to registration or qualification under the laws of such state or jurisdiction. Any such offering can be made only at the time a qualified offeree receives a Confidential Private Offering Memorandum and other operative documents which contain significant details with respect to risks and should be carefully read. Neither the Securities and Exchange Commission nor any State securities administrator has passed on or endorsed the merits of any such offerings of these securities, nor is it intended that they will. This document is for informational purposes only. Securities distributed through Morgan Creek Capital Distributors, Member FINRA/SIPC or through Northern Lights, Member FINRA/SIPC
Forward-Looking Statements: This presentation contains certain statements that may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical fact, included herein are “forward-looking statements.” Included among “forward-looking statements” are, among other things, statements about our future outlook on opportunities based upon current market conditions. Although the company believes that the expectations reflected in these forward-looking statements are reasonable, they do involve assumptions, risks and uncertainties, and these expectations may prove to be incorrect. Actual results could differ materially from those anticipated in these forward-looking statements as a result of a variety of factors. One should not place undue reliance on these forward-looking statements, which speak only as of the date of this presentation. Other than as required by law, the company does not assume a duty to update these forward-looking statements.
No Warranty: Morgan Creek Capital Management, LLC does not warrant the accuracy, adequacy, completeness, timeliness or availability of any information provided by non-Morgan Creek sources, including accessibility of unavailable funds.
Risk Summary: Investment objectives are not projections of expected performance or guarantees of anticipated investment results. Actual performance and results may vary substantially from the stated objectives with respect to risks. Investments are speculative and are meant for sophisticated investors. An investor may lose all or a substantial part of its investment in funds managed by Morgan Creek Capital Management, LLC. There are also substantial restrictions on transfers. Certain of the underlying investment managers in which the funds managed by Morgan Creek Capital Management, LLC invest may employ leverage (certain Morgan Creek funds also employ leverage) or short selling, may purchase or sell options or derivatives and may invest in speculative or illiquid securities. Funds of funds have a number of layers of fees and expenses which may offset profits. This is a brief summary of investment risks. Prospective investors should carefully review the risk disclosures contained in the funds’ Confidential Private Offering Memoranda. No investment is risk free; loss of principal is possible. Alternative investments involve specific risks that may be greater than those associated with traditional investments. One should consider the special risks with alternative investments, including limited liquidity, tax considerations, incentive fee structures, potentially speculative investment strategies, and different regularly and reporting requirements. There can be no assurance that any investment will meet its performance objectives or that substantial losses will be avoided.