CEO @venhedge — multimanager investment firm in SF. Not financial advice. Not soliciting investors.
Joined October 2012
- Tweets2.1K
- Following2.5K
- Followers553
- Likes4.5K
Pinned Tweet
Optimal Diversification = Stocks + Hedge Funds + Private Equity + Venture Capital + Real Assets + Digital Assets + Cash & Credit
Investing in managers, I want them to be concentrated in their best ideas. Risk management then comes from diversification across many independent managers.
Best Ideas
hbs.edu/ris/Publication%20Fi…
We find that the stocks in which active mutual fund or hedge fund managers display the most conviction towards ex-ante, their “Best ideas,” outperform the market, as well as the other stocks in those managers’ portfolios, by approximately 2.8 to 4.5 percent per year, depending on the benchmark employed. The vast majority of the other stocks managers hold do not exhibit significant outperformance. Thus, the organization of the money management industry appears to make it optimal for managers to introduce stocks into their portfolio that are not outperformers. We argue that investors would benefit if managers held more concentrated portfolios.
Every well-diversified portfolio needs a low-correlation bomb shelter allocation.
Especially the more risk on, aggressive investors. The bigger the tolerance for high-vol allocation, the bigger the low vol bedrock should be. Barbell must balance.
Sustaining above-average investment performance goes far beyond being able to identify great assets. Position sizing, risk management, instrument selection, the list goes on.
One of the most important first principles in portfolio management is to maintain a minimum allocation to lower risk “market insensitive” assets such as hedge funds, cash, bonds, reinsurance, etc. These assets comprise the ballast upon which a portfolio can comfortably stack riskier strategies.
We used to spend 20,000 hours per year across 20+ people auditing the financial statements of a large hedge fund. With AI that could be done in less than 2000 hours across only several people and with far higher quality. Let’s see what happens to audit fees in the decade ahead.
Investing alongside my partners (clients), it’s far more disappointing to lose their money than my own. And vice versa.
Markets don’t ordinarily offer mid-teens net returns for high-single-digit vol. Achieving that level of volatility-adjusted return for sustained period would be extraordinary.
“Invest in what you know” is arcane financial advice. I know very little within the universe of different investment strategies — which in 2026 is huge. But that doesn’t mean I should avoid those strategies. Rather I seek partnerships with high-integrity, expert investment managers who offer well-aligned access to their respective strategies. Quant hedge funds for example - I know almost nothing - but the genius folks like Cliff Asness at AQR know about quant - and that’s plenty good enough for me.
We diversify across managers and strategies because we acknowledge that we can never be fully certain on what comes next.