The Ledger
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Blitz: Popular short equity volatility strategies are a very risky proposition
“You know, I'd say one, I'd call it maybe an orange flag or red flag on the equity volatility side is you're seeing a lot of people today go, go explicitly short equity volatility and it's being packaged as a quote unquote alternative strategy. We think that th…”
Blitz: Market liquidity risks are underrated due to superficial intraday churn
“I think liquidity risks right now are underrated and underappreciated. There's a lot of optics of good liquidity in markets. But a lot of that liquidity, especially in equity markets, is just day trading back and forth, and if you need to get out of a fairly s…”
Blitz: Multi-Strat Risk Systems Create Exponentially Understated Crowded Risk
“I think some have what optically seem like good risk systems that are very backward looking. You have lots of people using the same risk systems. I think it can lull you into a false sense of security that can make you feel like, hey, I can lever up my portfol…”
Blitz: Passive and pod shop flows create alpha vacuum for stock pickers
“So what's happened the last 1012 years, you've had a lot more money flow into passive investments versus active investments, and you've had a lot of money flow into the platforms, which Not to paint a broad brush, but generally are shorter term traders. And so…”
Blitz: 100% long by 60% short is optimal long/short equity exposure
“So there's kind of a sweet spot in the middle where there's enough exposure and let's call this a hundred long by 60 short as sort of a sweet spot, if you will. Depends a little on the volatility and dispersion of the area. You can probably go a little lower t…”
Blitz: The illiquidity premium has inverted into an illiquidity discount
“Somewhere along the way, the last five years or so, the
Illiquidity premium somehow turned into an illiquidity discount.
I don't really understand it.
Used to be you demanded a higher return to lock up your capital, to lose the ability to make a change in mana…”
Blitz: Recent flood of private illiquid managers will fail to meet expectations
“Many managers have come out recently to meet this demand, and we just don't think the results collectively are going to be what people want, but they might not really care because the people in the seats making those decisions might change by the time the poor…”
Blitz: Avoid top-performing distressed debt managers chasing low-return risk
“I'd argue in the recent period managers who've done great, you would probably want to be more cautious of the managers who've done sort of mediocre because they might be chasing risk rewards that aren't very attractive.”
Blitz: Long/short equity offers the greatest manager diversification among hedge fund strategies
“We actually think long, short equity is the strategy where you get the most diversification among underlying managers.”
Blitz: 90% of long/short equity managers add no value after fees
“And I mean, I would caveat that with, you know, we think 90% of them probably add no value net of fees.”
Blitz: Top long/short equity managers face high alpha prospects from ETF flows
“For the 10% who are really good though, we just think that the distortions between individual stock prices and their fundamentals is just going to continue to grow because it's going to be influenced by ETF flows and index flows and things like that, and so fu…”
Blitz: SVB crisis triggered a violent two-year Treasury squeeze via illiquidity
“You saw in March of this year where you had a pretty violent move in the two-year bond, one of the most liquid assets in the world. Many macro managers were positioned in that bond. They had to get out of that position when the Silicon Valley Bank news hit. Mo…”
Blitz: Repeatable Macro Alpha Comes From Trade Structuring, Not Thematic Bets
“So the thing that we think is repeatable is having an edge in trade structuring and implementation. So basically instead of saying, I'm going to put all my eggs in the Euro basket or put all my eggs in the basket of the tenures going up, sort of view things th…”
Blitz: No-hurdle incentive fees cost allocators 80 to 100 basis points
“With short rates going up, especially in the long short equity space where people are earning short rebates now of call it four to five percent macro strategies where people are earning that on unencumbered cash, really without any skill, the manager is off to…”
Blitz: The average hedge fund adds no value net of fees
“I think the industry as a whole, and we, we've always felt the industry as a whole does not really add much value, if any value, net of fees. So the average manager isn't very interesting.”
Blitz: Real estate offers high alpha due to limited security-level scrutiny
“A sector like real estate is sort of a boring sector, right? There's not that many people who are looking security by security and saying, you know, here's the characteristics of REIT A versus REIT B, right? It's not a particularly exciting area, but it's one …”
Blitz: Bottom-up manager selection beats top-down asset allocation in hedge funds
“Much more bottom up. You know, we think the scarce resource are really great, great managers. And, you know, we've learned this the hard way, right? When you try to say, here's my view of the world, let's shove a mediocre manager in to fit that view of the wor…”
Blitz: Allocators should redeem immediately when a manager's passion deteriorates
“If you start to sense, boy, the mentality of the manager is changing or something about their strategy or something about their love for the business is kind of Changing for the worst. Even if they're going through a drawdown, you're still better off probably …”
Blitz: Allocators should add to underperforming managers and trim top performers
“You want to be reducing when someone's doing well. You want to be adding when someone's doing poorly if everything else, all else is equal. You want to be investing in a new manager, at least new for our portfolio after a period in which they've been strugglin…”
Blitz: Evanston prefers early-stage managers because principals are hungrier
“That often leads us to early stage managers who aren't managing a lot of money. The principals of the firm are hungry at that time, and there's not many good ones like that out there, but those are the ones we tend to prefer.”
Blitz: Hedge fund return expectations increase linearly with short-term rates
“I think the total return expectation for most hedge fund strategies, like Craig said, has gone up linearly with a level of short rates, even without any change in skill from the manager perspective”
Blitz: Higher base rates could restore hedge funds to endowment portfolios
“It's very hard to include a hedge fund strategy, even if it has a very high sharp ratio or risk adjusted return, if the total return is only three or four percent. But now that we've hopefully cleared that threshold, at least from an expected perspective in mo…”
Blitz: Low gross and net exposures destroy hedge fund returns after fees
“A lot of long short equity managers actually run at too low of an exposure, both gross and net exposure, and you need such a tremendous amount of stock picking alpha to overcome that cash drag, to overcome the fees that they charge in order to generate somethi…”
Blitz: Catastrophe reinsurance offers compelling, uncorrelated risk premiums
“The niche strategy that's interesting right now is in catastrophe reinsurance. So you've had a lot of hurricanes and other perils over the last five years, obviously for good reason, a lot of concern about climate change. So the demand to sort of reinsure agai…”
Blitz: Evanston prefers smaller, sector-focused long/short equity managers
“So long, short equity, which you know, is a good part of what we do. We've always preferred smaller managers and managers with a sector of expertise, you know, all else equal.”
Blitz: Evanston prefers larger distressed debt managers with established infrastructure
“Distressed debt is very different. You know, we generally prefer larger managers. They're managers who can afford the infrastructure, the legal expertise. They've been through multiple credit cycles.”
Blitz: Quantitative risk models work in 98% of cases but miss tail events
“We have a framework we call our qualitative risk framework where effectively, you know, we think quantitative measures of risk work in 98% of the cases, but it's the two percent of the other cases that you really need to worry about.”
Blitz: Evanston allocates nearly half its portfolio to long-short equity
“If you look across the firm, probably about, you know, close to half is in long-short equity, maybe 15 or so percent in macro, 20% event-driven and the remainder in relative value. Very little quantitative strategies and very little in the way of strategy that…”
Blitz: Investors are poorly compensated for crowded, high-leverage strategies in illiquid markets
“And when you start combining highly leveraged strategies with strategies that are crowded, where people are looking at similar factors in a market that we still think is fairly illiquid, you know, in our view, those are risks that you're not particularly well,…”
Blitz: Manager selection depends heavily on qualitative soft factors
“We think so much of manager selection and trying to figure out who's going to do well prospectively is based on much softer
Factors such as, you know, why is the person doing this?
What drives them?
Do they really love this?
How competitive are they versus are…”
Blitz: The importance of trading and execution is dramatically understated
“I think the, it's so dramatically understated the, you know, how important trading is in any investment strategy, market impact, implementation.”
Blitz: A clear portfolio construction approach strongly predicts manager success
“What we found over the years is that, you know, the more folks are confident and have a handle on their own approach to portfolio construction, as opposed to kind of blowing in the wind on it, the much more likely they're going to be successful in it.”
Blitz: Track records built on low capital bases struggle to scale
“And a lot of times in the past, you might have what appears to be an optically good track record, but it was done on a very low capital base, or there was some sort of issue that enabled them to do well out of the gates, but at any sort of larger size, you kno…”
Blitz: Evanston immediately rejects hedge fund managers showing a sleaze factor
“You know, we have a term we just call sleaze factor, which is whether it's on the investment side or the operational side, if you're meeting with the manager and you're just not getting a great vibe from them, you're getting incomplete answers. Just, it doesn'…”
Blitz: Evanston requires unanimous nine-person committee approval for new managers
“So we have a nine person investment committee that is the formal kind of investment body, if you will, of the firm. And we need unanimous approval of all nine of those investment committee members before someone makes it in the portfolio. Only really need one,…”
Blitz: Evanston's best hedge fund investments rarely check every box perfectly
“Very, very few of our, you know, best investments have had every single box check absolutely perfectly, and in fact, some of our more mediocre initial investments have been the things that kind of check every box, but again, that spark wasn't necessarily there…”
Blitz: Evanston avoids tiny toehold allocations, investing in size from day one
“And I'd say when we do our day one investments, we do it with conviction and in size. And so you know, we're not believers in, hey, you know, let's take a 10 basis point position in a manager so we can all pat ourselves on the back that we knew that that manag…”
Blitz: Style drift from asset growth is Evanston's top redemption reason
“It's probably the number one reason why we redeem from managers is the style drift that comes from asset growth.”
Blitz: Trade structuring is a more sustainable edge than directional macro calls
“Something like the ability to structure trades very well, or, you know, say, hey, here's my macro view, but I'm going to position myself in such a way that if I'm right, you know, I'm going to do really well, and if I'm wrong, I'm going to, you know, lose a li…”
Blitz: Many bonds inside liquid high-yield ETFs rarely trade daily
“You know, even in the high yield ETF, a large percentage of the high yield bonds comprising that ETF don't even trade Hardly on a day-by-day basis, even though the ETF itself is very, very liquid.”
Blitz: Liquidity mismatches in commingled credit funds harm long-term investors
“If you're in a commingled fund and credit, and the manager is very liquid terms, but the underlying assets aren't very liquid, that can get you in trouble very quickly. If they put in a large redemption and start selling at bad prices, that negatively affects …”
Blitz: Evanston's long/short equity managers run 40% to 50% net exposure
“So, you know, if you look across our long short equity manager universe, I would say the net exposure is probably between 40 and 50%.”