DIANE HARRISON The Haves and Have Nots of Todays Markets

This article first appeared on January 24, 2014: http://allaboutalpha.com/blog/2014/01/23/the-havesand-have-nots-of-todays-markets/

The Haves and Have Nots of Todays Markets

new year is a natural time for optimism, for wanting to start afresh, and to right some wrongs of the prior year. And yet since 2008 U.S. fiscal policymakers have touted signs, imagined or actual, of economic strengthening to be a signal to renew their posture towards easing that keeps the markets on perpetual training wheels, secure in an upright position

but unable to travel very far or very fast. This situation has also contributed to hedge fund managers struggles to compete with an artificially-buoyant equity market. It seems a good time for an introspective look at what might beset the alternate universe the global markets have become enmeshed in. What follows are some suggestions and new perspectives for the coming year that flip the table on which characteristics are the ones most desirable. Lets contrast todays market haves with some have nots and see where that trail might lead. The conclusions just might provide hedge fund managers with a sharper focus on where they could drive market discussions and showcase their approach value in 2014. The Markets Have: Artificial government manipulation must, at some point, come to an end. While government interventions are an essential component of global market dynamics, they are not, nor should be, a proxy for market dynamics long-term. The current policy stance has been actively manipulating global markets for years, preventing the realities of past market actions from being fully realized in todays markets. While equities have enjoyed a sustained run-up on the back of this action, other assets have not fared so well, leaving investors overexposed to equities and concerned for their portfolios. The Markets Have Not: Survival of the fittest is the law of nature and should be a default stance for the environment of our market place. Expectations in both the natural world as well as the financial world should be that the best equipped to survive will prevail while the less successful will logically suffer from their shortcomings. This has worked as an adaptation model for millennia, which seems reason enough to adopt it again for the current financial realities of our global world. Managers who can play up their nimbleness to adapt to the markets and find specific value opportunities underneath the larger structural market moves will do well to describe these approaches to investors looking to leap frog the choppy market overall to uncover value in isolated channels.
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DIANE HARRISON The Haves and Have Nots of Todays Markets

The Markets Have: Market dynamics will never normalize until market adjustments are allowed to play out. Although many people have co-opted variations of the maxim, Ben Franklin was the first to use there is no gain without pain" in his article The Way to Wealth. Why are people so reluctant to experience the downside of anything today? From childrens sports teams that arent allowed to keep the actual score (Everyones a winner on our teams!), to our government bailouts of wholesale industries, the avoidance of pain seems to be the primary driver rather than an occasional outcome of normal forces. Until this imbalance is corrected, there will continue to be this unnatural tension in the markets, which creates additional, and unnecessary, risk. The Markets Have Not: There should be an ability to let the markets set their own prices. Allowing prices to self-regulate optimizes interaction between asset classes and allows for free market enterprise to grow. In addition to adding an unnecessary layer of risk, interfering with price relationships can wreak havoc with strategies and investment actions across all markets, causing more market instability. How can money managers implement investment plans when they are at the mercy of intervention actions and pricing that has its basis in political and not economic rationale? Managers are left to react defensively to markets, rather than to plan proactively and execute strategies with forward-thinking outlooks. This negatively impacts company growth plans, hiring, developing and expansion planning, and can be seen in the prolonged struggle to expand the economy. In the first jobs report released in 2014, the US economy managed to add a mere 74,000 new jobs, far under the anticipated 200,000 jobs analysts expected. If a manager has an approach that can uncover true pricing discrepancies and exploit them successfully, that is a story which should be touted to investors with the fortitude to listen. The Markets Have: Playing by the rules is not rewarded when the rules themselves are in play by governments. Another troubling statistic released early in 2014 was the steep falloff in people actively seeking new employment. The U.S. unemployment rate may have dropped to 6.7%, but the drop was more a reflection of the numbers of people who have given up looking for employment. Clearly this is not a vote of confidence on any level for the health of the U.S. economy. Adopting the wait and see mode has been too long in play by investors and companies, leading to an ingrained case of investment ennui. There is little incentive for investors to take a stance and risk capital on longer-term growth plans when the metrics for evaluating investments are compromised by intervention activity. And yet investors are eager to deploy their capital into bettersuited avenues to generate alpha. For the intre pid managers who are not content to wait and see what the larger markets will do, this is the time to pinpoint their target investor base and start talking specifically and with enthusiasm to all who will listen about why and how their approach can succeed in 2014. The Markets Have Not: The fairest culture is one of meritocracy. Rewarding individuals, or companies, or countries, for outcomes and contributions is a democratic and easily understood way of establishing hierarchy. To manipulate results and outcomes through other means, often perceived as opaque or confusing by participants, lessens the impetus to participate and leads to mediocrity and a lower standard of acceptance. I once worked in a large organization that asked its employees for peak performance in all work efforts, yet spent an inordinate amount of time
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DIANE HARRISON The Haves and Have Nots of Todays Markets

at performance evaluations defending the par pay standards the company claimed were in line with its industry compensation levels. It may seem obvious to state, but one cannot expect peak performance for par, or average, pay. The input/outcome is a self-fulfilling prophecy. In other words, you get what you give. Fortunately, most hedge fund managers never drank that particular Kool-Aid of mediocrity, and both believe and act on the premise that they possess a superior sense of how to create value for themselves and their partners. The Markets Have: Political goals are not always in line with economic realities. No one believes that there wont be fiscal and governmental action within the financial markets, and in large part these practices have been accepted and built into investment assumptions and models for decades. However, the sweeping actions and prolonged emergency measures which have found their way into gl obal markets these past years have become uncomfortable guests at this party, leading to extra concern and layers of indecisiveness that have contributed to our current market weaknesses. Its become very difficult to predict market moves in relation to ea ch other, and correlation concerns, particularly when market risks seem to be rising, are a major outcome of the political interventions. The Markets Have Not: Failure is an essential part of success. Anyone who has enjoyed the experience of mastering something has also felt the sting of failure. Its a natural part of striving to achieve that occasionally there will be setbacks and missteps. Our markets are no stranger to this phenomenon, yet our policy makers seem doggedly determined to minimize the downside of as many outcomes as possible. This naturally will lead to a minimization of real progress, as those market training wheels of intervention continue to hamper the true path our markets want to travel. 2014 will hopefully not go down as another year in which market participants, both manager and investor, hold their breath and wait for a fiscal revolution to effect change. Change will come at the hands of those who take the wheel and drive it for themselves.

Diane Harrison is principal and owner of Panegyric Marketing, a strategic marketing communications firm founded in 2002 and specializing in a wide range of writing services within the alternative assets sector. She has over 20 years of expertise in hedge fund marketing, investor relations, sales collateral, and a variety of thought leadership deliverables. A published author and speaker, Ms. Harrisons work has appeared in many industry publications, both in print and on -line. Contact: dharrison@panegyricmarketing.com or visit www.panegyricmarketing.com.

PANEGYRIC MARKETING| JANUARY 2014