Cash On the Sidelines Fallacy Continued

Cash On the Sidelines Fallacy Continued

Cash On the Sidelines Fallacy continued by David Merkel, CFA of Aleph Blog

I would like to add one more idea to my piece, Conservation of Liquidity, under most Conditions.  This is the concept of an asset-liability liquidity mismatch.  When absolute return managers like Buffett, Klarman, etc. start building up cash, the market should get a little nervous.  They don’t commit capital unless they can meet certain return targets.  When they aren’t investing, it means the markets are likely overvalued.

Think about it: long-term investors accumulating cash.  They are mismatching short with respect to time, and long with respect to liquidity.  Since the world in aggregate is always matched, who is mismatched long with respect to time, and short with respect to liquidity?  I can’t say for certain, but I would look at hedge funds and mutual funds that have to justify their existence quarter-by-quarter.  When they are fully invested, it is a time to be cautious, because a downturn in the market could turn them into motivated sellers.

And so, be wary when valuation-sensitive investors pull back.  It is not a good sign for the markets.

This mining and metals fund is having a strong year so far

Cubic Corporation Chris Hohn favorite hedge fundsThe Delbrook Resources Opportunities Master Fund was up 9.2% for May, bringing its year-to-date return to 33%. Q1 2021 hedge fund letters, conferences and more Dellbrook is an equity long/ short fund that focuses exclusively on the metals and mining sector. It invests mainly in public companies focused on precious, base, energy and industrial metals Read More

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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