Multi-Asset Investing Made Simple

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Includes: AHL, AQMIX, BPIRX, FCAU, GLRE, NFLX, NLSAX, SGOL, TPRE
by: Hedgephone

Summary

Allocating capital across uncorrellated long term investments is much  less speculative than people think.

You can invest the same way the big banks invest.

Mitigating risk is cheaper and less complicated than it used to be.

Look, the dollar has lost 96% of its value since the 1930's. That's a great reason to own real estate, stocks, collector automobiles, fine art, etc. ... and a great reason not to hold cash. As a patriot, I'm confident that our country will turn this debt and debasement issue around eventually. There is not a lot of inflation in commodities at the moment, just Bitcoin and financial assets. How long the trend lasts is anyone's guess.

Unfortunately, stocks, bonds and real estate aren't guaranteed to go up in all market climates. Periods of volatility separate the men from the boys.

One way that the world's richest investors sleep well it night is through the capital markets' only free lunch -- diversification. Yale's David Swensen, who has ran the endowment there quite successfully, gaining 11.8% per year from 1999 to 2009 with a multi-strategy approach, has routinely held as much as 30% in hedge funds and 25% in private equity investments with a 30% weighting to equities and a 15% allocation to bonds, for example. Many other endowments went to this diversified model because they need a stable investment platform which is not held hostage to booms and busts.

Banks invest the same way. Managers are selected in a diversified manner utilizing uncorrelated strategies to create high Sharpe ratio returns of approximately 1-2% per month. If a fund makes too much money, the bankers will often pull the money because they hate drawdowns and "rock and roll." If a fund loses 10% or more, chances are they will get fired. The big megabanks can find your liquidity and positioning in real time and will pull money simply if they don't like your tie.

One thing the smart money wants is a world currency. That's not very bullish for global fiat currencies, and with a 96% loss (to quote Chairman Buffett) since 1930, we think US dollars and other fiats will continue to decline at a brisk rate.

That said, by diversifying into gold, platinum, timber, raw land, equities, classic cars, heavy industrial equipment, real estate, etc. ... we can use the same approach that Harvard and Yale use to protect our purchasing power and capital long term. The best person to explain hedging and hard assets is Robert Kiyosaki -- he has been 100% on point regarding borrowing FIAT to buy real assets like cash flowing rental property. Is it risky? Sure, but here him out -- in 1971 our money went from equity to debt when we went off the gold standard.

The central banks passionately hate gold and silver, so you can dance around that by picking up "obscure" hard assets like classic cars or high end classic car parts, building a house, owning timber, etc. ... Stocks might not always go up like the central planners want, but the CB's want the rally to last forever so people don't abandon FIAT for, say, Litecoin. I don't think it's that big of a risk.

It seems to me that gold and silver are lot harder for governments to control than Bitcoins, which can be banned by any governing body or stolen by hackers. It's very cool technology and as a libertarian I like the idea of corruption free/conflict of interest/agency conflict free money. Very libertarian. Blockchain may seem "impenetrable" but at the end of the day they are "competing currencies" with fiat currencies because they have no intrinsic value without your internet connection.

"The Fed must expand the scale of its asset purchases if inflation goes near zero," said Ben Bernanke circa 2002 -- you cannot fight the inflation long term or the central bankers misguided Keynesianism and their printing presses. It's the parabolic chart that worries me. The Fed has 2.5 trillion in bonds, which crowded us savers out of making anything on our savings. The problem was that when Bernanke wrote about this in 2002, he could not have envisioned the debt expansion and asset bubbles these asset purchases would create -- we now stand at a precipice. The printing press will ultimately play an increasingly important role -- whether the side effects kill stocks or not is anyone's guess. When the next crisis comes, the Fed will probably go back to their only playbook: print, print, and hopefully inflate. Phillips curves aren't necessarily relevant when the vacuum you are studying is the bubble that you created in the first place.

Here are some funds and tickers you can research to copy Yale's Swenson (like Harvard did) and hedge some of these longer term and immediate risks:

Daniel Einhorn's offshore reinsurance vehicle, Greenlight Reinsurance (GLRE) is a good way to gain exposure to hedge fund with a strong, risk adjusted track record. He may be down in the short term but he is not out and sometimes the best time to invest in a strategy is when it is struggling. He did pretty well on Micron, but the Netflix (NFLX) call was early -- they still don't have strong balance sheet, but no one thinks that matters for now.

Third Point's reinsurance stock (TPRE) is basically an alternate way for the little guy to invest with Daniel Loeb. Are there some risks with reinsurance? You bet. Just look at what happened to Aspen Insurance (AHL) last week, dropping more than 10% in a day, which is unheard of in this one way market environment. I like the reinsurance business right after bad hurricane seasons, but make sure to read 10-K's and 10-Q's to research potential liability exposure.

Neuberger Berman Long Short Equity (NLSAX) is a newer fund but is a good choice for long term investors and seniors. The firm, founded by the venerable Roy Neuberger who never went to college but shorted RCA BEFORE the 1929 crash, is one of the best value investment, research driven firms around.

Boston Partners Long Short Equity (BPIRX) is a good option for people looking for hedge fund allocations but who like transparency, daily price quotes, low fees, and a solid long term track record. Another solid fund that has a decade long track record of positive returns with very few drawdowns.

AQR Managed Futures (AQMIX) is one of the largest "hedged" mutual funds with $11 billion under management and fairly reasonable, transparent fees. The strategy is long term trend following in the futures market and returns have been choppy but reasonably acceptable, with a very nice return YTD.

The Swiss Physical Gold Vault fund I prefer to (NYSEARCA:GLD) is (SGOL) -- Gold is a must have at this point, but wait for a correction. Inflation is coming... Hopefully the America First strategy will keep the Dollar alive until we figure out how to become Iceland and not Greece.

As for hedge funds with the best long term records, look to Mohnish Pabrai at Pabrai Investment Funds who made a 100% return in 2017 largely thanks to Fiat Chrysler (FCAU). It wasn't an easy ride, however, as he had a 50% or so drawdown before Fiat shot up 300% on solid earnings momentum over the past two years.

Another strong fund which is uncorrelated to equities is Dunn Capital Managements World Monetary and Agriculture fund Home - Dunn Capital

Bill Dunn is one of the most famous trend following "Turtles" and has returned a compound average annual return of close to 14% a year since 1984... A legend in the world of futures trading indeed.

Some of the smartest investors I know think that investing in a hedged product guarantees mediocrity. In my opinion, it's a better way to invest in frothy markets because you can get some sleep at night and have diversification working for you. With stocks, the illusion of diversification exists because the median or average stock is quite expensive currently, making diversification less rewarding. In equities, look to cheaper names with strong economic moats but avoid the momentum names at present.

Disclosure: I am/we are long AQMIX,NLSAX,BPIRX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: long raw land, gold, silver, collector cars, rebuilt transmissions, Fiat chryslers and Fiat currency