Eric Peters, chief investment officer at One River Capital Management, thinks he understands hedge fund under-performance in an “Alice and Wonderland” world. In his recent weekly letter he points to central bankers mind-altering influence on free market supply and demand, but the real issue is about access to information. During the golden age of information, Wall Street had an edge that no longer exists, he asserts.
Eric Peters: It is the general lack of market information that benefited the elite
There was a golden information age for hedge fund managers, the outspoken Eric Peters noted in his much-watched weekly newsletter. Although for hedge funds the information age was not about faster transmission of information, as is the common technical definition for the historic period of time. For hedge fund managers it was the un-democratic control of information that was the gilded era.
“When the industry was smaller, and you heard a little something about what a central bank was going to do, you’d place your bet and cash in,” Peters opined, discussing the information age on Wall Street. “When you gleaned insight into an earnings announcement, or a merger, you killed it. The early outsized returns of our industry greats were built upon this simple formula.”
Hedge fund managers with access to information before others were winners.
From several perspectives trading has always involved an information benefit that can today be seen in its extreme in high frequency trading. The argument can be made that elite early access to information has always driven investment returns. This can be seen in carrier pigeon’s used in continental Europe to deliver inside information to investors of regional war results to leaks given to the Wall Street elite that Alexander Hamilton was planning on purchasing then considered worthless revolutionary war debt through the Funding Act of 1790 are all examples where information advantage assisted select investors. At a slightly later date, Bleichroeder together with Bismarck used their information as leaders of the German Empire to profit off wars, future Reichstag bills and more.
The golden age of insider information is over
Eric Peters says this golden age is over. Quoting a strategist of a similar outlook, he notes the ability to collect information faster than the other guy – now defined by a speed faster than the blink of an eye – is “no longer a skill” without value. “Tighter regulations and instantaneous information dissemination has made it knowledge,” he says.
Differentiating between acquisition of inside information and trading skill can be difficult to discern, the report said, pointing to computers and wondering “Is there a skill to trading for non-computers?” You know, “emotional creatures with blood flowing their veins?”
But he not only considers the human element, but reverts back to the age-old Wall Street argument that often delineates between a dirty “trader” and the more beneficial to society “investment manager.”
Eric Peters ends his weekly report by asking what is the difference between a “trade” and an “investment?” Is an “investment manager” superior to a “trader?”
“After analyzing my biggest wins, I’ve discovered they were all great longer-term investment ideas disguised as trades,” a strategist is quoted as saying. “This is my skill.”
In the information age, access to inside information is no longer an advantage, is a primary message that Eric Peters sends. This can be a debatable point; numerous traders continue to evaluate the establishment consensus with the goal to find holes – and have success in doing so. There are analysts who do nothing but look at a corporate earnings report or official statements to find inconsistency to short a stock. These are informational analysis skills that still remain among hedge funds.
Trading and investing skill may be one in the same. The key sometimes can be found in those who refuse to be sheep and blindly follow the carefully laid dictum of the consensus. And value investors will likely find solice in what Peters is saying.