Aiming for Transparency by David Merkel, CFA of AlephBlog
Here’s another letter from a reader:
I’m starting this fund, and I wanted to get your opinion.
What can past market crashes teach us about the current one?
The markets have largely recovered since the March selloff, but most would agree we're not out of the woods yet. The COVID-19 pandemic isn't close to being over, so it seems that volatility is here to stay, at least until the pandemic becomes less severe. Q2 2020 hedge fund letters, conferences and more At the Read More
It is best explained on YouTube in 55 seconds: let me know what you think https://www.youtube.com/watch?v=frwOrQd3f6w. It (hopefully) will provide incentive for transparency in funds.
Okay, I can’t embed the short video, so click on the link above and watch it — it is less than a minute, and well-done.
To the writer:
I admire your efforts at providing transparency here, but let me tell you where I think this may have unintended negative consequences.
Anytime you provide total transparency, you invite front-running, if the manager is any good. New ideas are often most potent at their beginning, and given the delay between notifying mutual fund shareholders, voting and implementation, critical time is sacrificed, and some of your shareholders may front-run you.
Imagine a person investing the minimum in your fund so that he could front-run your picks with a greater amount of money. But even if front-running does not happen, it is generally wise to move rapidly once the manager has come to a decision. The delay from having shareholders vote on it is likely a money-loser. Also during times of crisis, the manager may have some of his best ideas, but when average people are scared, will they be willing to pull the trigger? I have my doubts.
In general, I favor investment methods where decision-making is done by individuals. If I were running a hedge fund, or a large mutual fund, I would delegate all decisions to the sector/industry analysts. Let sharp opinions prevail. I’ve worked in areas where groupthink muddies investment decisions — it does not lead to outperformance.
You don’t need to have shareholders vote on investments to have transparency. You could do what I do, because all of my investors have full transparency.
I manage separate accounts using Interactive Brokers. We buy and sell as a group. We all get the same buy and sell prices. I don’t trade often, but any investor can monitor his/her account all day long. They can set up a daily download so that they can see what actions have been taken, if any. There is total transparency, to the degree that my investors want to make the effort. And remember, making investors go through a lot of effort is a negative.
If I Were in Your Shoes
If I wanted to give your investors transparency, I would give them access to a website showing the portfolio in real time, set up in such a way that only they could see it. I would not let them vote on investments. If you are hiring a manager, let him manage. Second-guessing and delay are a waste of time and money.
Now those are my thoughts, and maybe your views on running a democratic fund are important to you. Do what you think is best — just remember that democracy is not the same as transparency, and to achieve transparency, democracy is not needed. Information is power, and you want to be careful in how you share it.
All that said, I hope you succeed, and that it works out well for you and your shareholders!