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Lifestyles of the Rich and Famous: Where Do They Park Their Money?

August 28, 2019

Where do the wealthiest investors put their money?

I gained a view on this while I worked with hedge funds in Europe. The word ‘hedge’ means that the funds are focused on hedging against negative market risks and movements.

No matter what the market does, they may provide returns outside of it. Ideally in the form of ‘alpha’ growth. Growth that goes beyond market growth.

I recall one sunny London day. I’d taken the train from Gatwick Airport to Victoria Station. And walked to Mayfair to visit some of these funds. Through The Mall and past majestic Buckingham Palace, which thronged with tourists.

The Mall, London. Source: Wikipedia

On my way back, I got delayed. The Queen’s birthday procession had closed the road. Fascinated, I watched the carriage and horses go by. And like the Queen, who seems to go from strength to strength no matter the events around her, I reflected on the strategies of the funds I’d just visited.

Long-short equity

This is one of the most common. You go long on positions you believe will improve and then short on alternative positions — to either hedge your long position or gain further upside on positions you think will fall.

‘Going short’ means selling shares you don’t own. Borrowing them from existing shareholders, paying a fee and then buying them back to return — ideally at a lower price, once the price has fallen.

For example, you have a strong conviction that the US will win the trade war and see a resurgence of manufacturing. You might go long on US factory stocks. Short on some Shanghai.

Global macro

You undertake detailed macroeconomic analysis to uncover trends that will affect financial instruments. Then you take long or short positions to capture these.

Event driven

This covers a plethora of strategies. From finding companies in financial distress on the verge of turnaround…to situations involving mergers, acquisitions and takeovers. You’re looking for special situations that the market can’t readily price. Allowing you to pick up value and opportunity.

Black box/quant

Traders here look for trend lines. And develop a system or strategy to ride these trends.

My own experience with these types of ‘black box’ strategies is that they tend to work for a period. And then stop working. This is because it’s difficult for any devised system to constantly keep up to date with the myriad of changes in dynamic financial markets.

There are many other hedge-fund strategies.

Now, some hedge funds can perform very well. In 2018, the Odey European Macro Strategy delivered 53%.

Ongoing, though, most seem to fall within the 5-10% category. Despite the higher fees they charge. Sometimes as much as ‘2 and 20’. (2% Management Fee, 20% Performance).

One fund I worked with involved the world’s first regulated bitcoin strategy. The perfect hedge! Uncorrelated to equity markets. Dynamic, volatile and requiring detailed expertise. Performance ran in excess of 100%.

But I learnt a powerful lesson.

When you’re a family that’s already made £30 million, holding those funds in a trust — or a gentleman hiding £10 million in Jersey from his ex-wife — your main concern is not notching up huge returns but protecting the capital from the ravages of life and market risk.

So it was hard to convince the wealthiest investors to move into higher return strategies. Balancing risk was their chief concern.

The Lifetime Wealth Investor strategy

We’re not planning on taking short positions. This requires a high degree of trading expertise. And the risk level is notched up. While shorting can help you hedge the market, it’s complex. Plus, experience over recent years seem to suggest it’s gotten harder.

Our strategy, more than anything, is Value-Based Global Macro.

We hunt the world for robust value and margin of safety in the stock price. It’s a similar strategy to that employed by Warren Buffet and Charlie Munger. Find value around the world. And it’s worked out pretty well for them.

To find pockets of value outside of a small market like New Zealand, we apply a global macro approach. Where are global economies going that will temporarily reveal pockets of value? And where is the upside for capital growth?

Of course, this strategy requires some patience. So we like to see some passive income (in the form of dividends) along the way.

The exciting trend is this…

Never have there been so many opportunities for the active investor!

One of the fastest-growing forms of investing has been via index funds. These funds buy blindly into all stocks or instruments in their index.

They’re an ‘easy’ option for financial advisers and money gurus to recommend. It’s hard to pick stocks. It involves research. Especially for more involved strategies, like global macro. Why not just cut out management fees and go with the market?

This means many equities in certain situations — and through certain economic events — become mis-priced.

Most of the equities we target here come from a view that the market has not adequately priced them. Hence the opportunity.

Now, this week, we’re waiting to see what happens with two key crucial macro events.

• 1) The potential exacerbation of the US v. China Trade War.
• 2) The ‘touch-and-go’ Brexit deal, as Boris Johnson describes it.

The market is deeply nervous over both situations.

The China trade war threatens Australasian markets reliant on Chinese export hunger for their commodities.

UK domestic stocks like Crest Nicholson and New River remain in an uncertain holding pattern, waiting to see what post-Brexit Britain will look like.

Amid a bull market, these macro situations have revealed pockets of value and opportunity.

We’ve just been in touch via a contact at New River REIT to check how they’re going.

Despite the difficult retail environment in the UK, NewRiver seems to be managing to navigate itself through these challenging times. ‘We feel we are the best part of the retail market being community and convenience-led,’ they’ve advised.

Portfolio update

The market seems to be pricing in a bit more confidence toward a UK-EU deal. Unlike the previous leader, Boris Johnson shows he will not blink. This works. For the first time, we see the EU possibly opening to the alternatives on the Irish backstop obstacle.

Trump has taken the same approach with China. ‘I regret not raising the tariffs higher,’ he warns from the G7 Summit.

Will face-saving China be forced into a deal? That remains to be seen. But there could be upside. Especially since the world seems to finally acknowledge trade abuses should be called out.

It is fascinating to watch the heavyweights in the ring. Our bets ought to be prudent. On the more powerful side with a margin of safety.

Given recent gains, we’re upping some ‘Buy Up To’ prices and embracing the risk.

 Current as of 27 August 2019 at 9:45pm GMT.

As we get clarity on these macro situations, there’ll be some new, exciting recommendations in coming weeks.

One concern is the stumbling of the New Zealand dollar with the cut to the OCR. If you’re holding US dollars and even British pounds right now, I’d be keeping hold of them to invest.

Perhaps you could even top up on GBP at value as the opportunity presents.

The times are dynamic. And the market curve keeps flexing. Let’s keep ahead of it.

Regards,

Simon Angelo
Editor, Lifetime Wealth Investor