David Swensen on Funds, Distressed Securities and Investing

As someone once said, RUN, DON'T WALK!!!!! to read this interview in the WSJ. Here is a sampling (I didn't realize he is this blunt):

Mr. Swensen: Fund of funds are a cancer on the institutional-investor world. They facilitate the flow of ignorant capital. If an investor can't make an intelligent decision about picking managers, how can he make an intelligent decision about picking a fund-of-funds manager who will be selecting hedge funds? There's also more fees on top of existing fees. And the best managers don't want fund-of-fund money because it is unreliable. You need to be in the top 10% of hedge funds to succeed. In a fund of funds, you will likely be excluded from the best managers. [Mr.] Madoff also relied enormously on these intermediaries. He wouldn't have had nearly as much resources were it not for fund of funds.

Consultants make money by giving advice to as many people as possible. But you outperform by finding inefficiencies most of the market has not yet uncovered. So consultants ultimately end up doing a disservice to investors . . .

Mr. Swensen: Distressed securities are one of the most interesting opportunities for institutional investors. But returns won't come right away because the credit markets are fundamentally broken. TIPS [Treasury-Inflation Protected Securities] are pretty attractively priced. They promise reasonable returns, and protection against inflation is really important. We may not see it in the next year or two, but the government's massive fiscal stimulus can't help but produce massive inflationary pressures. Stocks also look a lot more attractive than they have for a long time. We prefer higher-quality companies with low leverage.

My first thought after reading the interview was "I think David Swensen has been reading the Investor's Consigliere!!"

My second, and more accurate thought was "I think the Investor's Consigliere has been reading David Swensen." No matter: if you do what I do and try to emulate one person (and you can't hope to marry Uma Thurman)--he's the one to emulate.

Comments

[Atakan:]

My take is that any instrument that is opaque will have a hard time justifying its existence in the new world order of investments. Back to basics....you don't understand how you'll make a return than DON'T INVEST for god's sake!

Jan 14 04:58 PM

[Fozzie:]

I completely disagree with Swenson. Building a fund of funds portfolio is very similar to building a portfolio of stocks, with the main purpose being to reduce idiosyncratic risk. They perform due diligence on the funds just like someone would do for a stock.

Jan 15 09:52 AM

[Romy:]

I too desagree with Svensen. I can opt for funds of funds to increase investment protection through diversification. The diversification and specific return offered by Funds of Funds through combination of various geographic exposure, different styles of investing and varied industry cannot be achieved through investing in a single fund.

Armel Romeo Kouassi

Jun 04 12:46 AM