Be careful what you wish for

Over the last two weeks, both institutional and retail investors have gotten a rude awakening from fund managers whose strategies – well, for lack of a better word – failed. Both of these investors’ managers touted their products as ones that zig when the markets zag – in others hedge the volatility and risk associated with market swings during things like a global pandemic, credit crisis, technology stock bubble and the like. The reality is this product did not deliver and like Mr. Buffett, the tide rode out and we all saw who was swimming naked.

The question is, what was the level of due diligence done both in the beginning and middle of investing with these types of products? It is unclear that investors did any serious due diligence at all. One investor quoted anonymously in Jason Zweig’s column in the Wall Street Journal said, “we have goals and we want to hit those goals.” One could infer from the comment that with so much pressure put on LPs to meet goals, they are willing to take risk and leave the due diligence behind. People, regardless of the size of their portfolio, pension plans, endowments, foundations, sovereign wealth funds and, of course, individuals, need returns. Yields are low, stocks are high and there is a real threat of inflation as the pandemic bailouts roll on. The answer for most, regardless of the size of your wallet, is alternatives. However, alternatives need to actually be alternatives, not just some option strategy that seems to be too good to be true. How quickly many have seemed to have forgotten about a split strike investor manager who, well, wasn’t.


The reality is that regardless of your wallet’s size and regardless of the pressures you are faced with to deliver investment returns, you need to do due diligence. Due diligence needs to be done on the products, the operations, the strategy, the people, the manager and the organization. In the situation with one of the recent blow-ups – a mutual fund – Infinity Q Diversified Alpha Fund requested to suspend redemptions. This means investors CANNOT get their money out. Now somewhere deep in the fund’s prospectus, there is a line about the manager’s right to ask the SEC to suspend redemptions. Well, how many, if any, actually read the prospectus all the way through? We bet the number is very low. However, we bet anyone unable to redeem their shares in the fund now wishes they had. The reality is due diligence is hard, but it needs to be done. You can’t simply rely on others to do it for you. Do the work. It will be worth it in the end.