Category Archives: Quarterly

Did Homeland’s Brody Just Signal “The End” for Hedge Fund Boom?

The End

The Doors

This is the end, beautiful friend
This is the end, my only friend, the end
Of our elaborate plans, the end
Of everything that stands, the end
No safety or surprise, the end
I’ll never look into your eyes, again


It Could be The End of not just Bobby Axelrod in 2017


Picture from Showtime Series “Billions” based on New York hedge fund world.


Truth be told, I liked actor Damian Lewis much better in the movie Homeland than in Billions. Although as a costume drama, Billions should win an Emmy. The film really nailed Wall Street wardrobes–fleeces for everyone.
After spending 18 years on a trading desk, of course I watched Billions. What red blooded American doesn’t love greed, envy, sex, manipulation and testosterone sprinkled with a heavy dose of Machiavellianism? Plus, Billions stars my favorite actor, Paul Giamatti, in a fabulous role that will leave you feeling “Sideways.”

When I first started in the financial advisory business, there were several well-known, albeit abstract market indicators such as “The Tallest Building Signal” or the “Magazine Cover Indicator.” If you don’t remember those gauges, the Tallest Building Indicator referred to the phenomenon in which the country boasting the world’s tallest building at the time would inevitably see its economy collapse not long after construction was completed on that massive edifice. The Magazine Cover Index was based on the theory that a person or subject featured on the cover of a major business magazine would experience a reversal of fortune soon after publication—kind of like the Sports Illustrated cover jinx for athletes.

For instance, if the top of a market–or a high flying money manager–graced the cover of a widely read business publication, then performance would soon start to go south. Or, once a major business publication signaled the end of market cycle, the opposite would happen. The most famous example of the Magazine Cover Index was Business Week’s infamous ‘Death of Equities’ cover, published on August 13, 1979, right before a multi-decade generational bull market ensued.
In the 1990s, bombastic TV personality Jim Cramer and CNBC exploded the stock picker savant image before the 1999 bubble burst. It was similar to the deluge of house flipping shows that invaded cable TV in 2007 before the world economic order nearly imploded in 2008 due to risky financing of U.S. homes. That leads us to wonder if actors Damien Lewis and Paul Giammatti have just “top ticked” the hedge fund boom?


Did Billions star Bobby Axelrod top tick hedge fund assets? “Billions” launched Jan 1, 2016

Let’s rewind for a second. The hedge fund industry has grown from a niche sector for the ultra-wealthy to a nearly mainstream financial asset class today. Less than 500 funds with $250 million under management existed in the 1990s. Today, there are roughly 12,000 hedge funds with over $3 trillion in AUM. Three out of four hedge funds (75%) are located in the U.S. God Bless America and all of our risk-taking glory. After the 2008 financial crisis, the world was primed for a “hedged” product and U.S. financial entrepreneurs gave the public everything it could handle. The problem is that if you dine with cannibals, sooner or later, you can be eaten. And right now, we have some financial vegetarians who are dining with cannibals. That’s not a good combination.

Some of the most successful hedge fund managers in history have recently lamented that there are “too many hedge funds” out there. The surge of American intellectual talent that’s piling into hedge funds to chase the same few ideas has resulted in a “lack of alpha” generation. As many of you know, alpha refers to the excess return that a fund generates relative to its benchmark index. Here are the recent hedge fund performance stats:


Hedge Funds Alpha

1998-2002  +8.0%

2003-2007  -0.7%

2008-2016  -4.5%

: “Incredible Shrinking Alpha,” by Larry Swedroe


Hedge Fund managers and traders do not come into the office at 6 am, fire up their Bloomberg terminals and try to underperform with your money. They are trying desperately to make you outsized returns, but there are just too damn many managers chasing the same ideas. California’s, New York’s and Nevada’s state pension funds are just a few of the institutional accounts that have removed hedge funds from their asset allocations.

In the last eight years, New York State’s pension fund paid $3.8 billion in fees to poorly performing hedge funds, according to a report published by the state’s financial regulator. According to the report, hedge funds were the worst performing of the six asset classes making up the state’s pension allocation—kind of ironic considering New York’s proximity to the hedge fund epicenter. It is true that pension funds are traditionally horrific market timers, but this latest trend feels more like a secular move than poor timing by institutional investors.

Hedge funds were once reserved only for the super-rich. Now, thanks to liquid alternatives, the mass affluent can theoretically gain access to the same “Masters of the Universe” who run hedge funds.  “Liquid alts” is an industry term for hedge funds that are offered through mutual funds or exchange traded funds (ETFs). They allow the average investor to access hedge funds through his or her retirement accounts. It seems Bobby Axelrod also managed to top tick the growth of liquid alternatives.


“Billions” Launched January 1, 2016 on the First Downtick for Alternatives Growth in 10 Years


Alternative Assets Go “Sideways” into launch of Showtime’s hit show “Billions” after a decade of exponential growth.



The free markets have a messy way of delivering progress–it’s called “creative destruction” which leads to lost jobs, ruined companies and vanished industries. This is the paradox of progress, but 100 million people died trying out Communism, the closest competitor to creative destruction. The pain and gain of capitalism are inextricably linked. America has always been built on creative destruction. In 15 years, we have seen the rise and fall of tech bankers, mortgage brokers and natural gas drillers. Some hedge funds will survive and thrive, while others will face the end. But, America will move forward either way.


This is the end, my only friend, the end
It hurts to set you free


But you’ll never follow me
The end of laughter and soft lies
The end of nights we tried to die
This is the end

Read more: The Doors – The End Lyrics | MetroLyrics


The Apartment Boom Is Ending, Long Live the White Picket Fence

“I recommend that every man own the roof that sheltereth him and his,” Arkad says. “Nor is it beyond the ability of any well-intentioned man to own his home.” Arkad argues that “to own his own domicile and to have it a place he is proud to care for, putteth confidence in his heart and greater effort behind all his endeavors.” — “The Richest Man in Babylon”

Key Takeaways

  • There are nearly 90 million Millennials in the U.S. today. Don’t stereotype them as debt-strapped city dwellers who will never seek the suburban dream.
  • Many members of Gen Y have good incomes and are in the prime years for getting married, starting families and yes, buying suburban homes in good school districts. They just start a little later.
  • Rents have never taken up a larger of the American worker’s paycheck. Would you bet on this trend continuing?
  • We believe strongly in real estate as a long-term investment, particularly in multifamily housing.
  • Private real estate investment generates “alpha” in a tax-efficient manner and is an excellent source of income in a world of near-zero or even negative interest rates.

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“Dream On” Presidential Election and Rate Hike Cycle Threaten the Markets

“I know nobody knows
Where it comes and where it goes

I know it’s everybody sin
You got to lose to know how to win”

— Aerosmith “Dream On


The next big worries putting pressure on the markets are the presidential election and the inevitable rise in interest rates. Some would argue that these headwinds are ultimately linked by politics. Although Republican nominee Trump may be the most unpredictable wildcard of all-time, we know from past Fortis letters pertaining to short-term volatility that “You got to lose to know how to win…” as legendary Aerosmith lead singer, Steven Tyler, would wail.

Rewind the clock about 250 years. Even then, our country’s Founding Fathers were planning for elections involving candidates much worse than the Donald and Hillary when they set up the checks and balances system of this great republic.

We expect a lot of media coverage, dissection and bar talk after Monday’s debate, followed by market volatility. But, let’s stay disciplined and look at history through the lens of our two apparent market threats—elections and rising interest rates. Both threats will certainly cause short-term instability, but they won’t be enough to change the business cycle dramatically in the near term. Remember, bear markets are caused by three things: recessions, global conflicts, and credit bubbles–not Presidential elections. But, that will be the topic for another Fortis letter.

Rate Hike Cycles    

There have been eight rate hike cycles going back to 1976 in which the Fed raised rates a minimum of 3 successive FOMC meetings.  The shortest cycle was nine months and the longest cycle was 39 months.

If you held a diversified portfolio consisting of 30 percent U.S. stocks (i.e. S&P 500), 30 percent global stocks (i.e. MSCI) and 40 percent Barclays AGG aggregate bonds you would have earned 8 percent annualized on average during the aforementioned cycles. Of the eight rising rate periods since 1976, there has never been an instance in which a diversified portfolio producing a negative return—that’s right never.

Here is a look at how the major asset classes performed during those cycles:

Domestic Stocks

  • One year up to the rate hike +18.1% vs. +11.6% historical average.
  • One year period following the final hike of the cycle, the S&P returned +14.6%.
  • During the rate hikes, stocks tend to perform worse than average, but still manage positive returns.


U.S. Bonds

  • AGG gained on average +11.4% in the 12 months after the rate hike cycle ends.
  • AGG returned 2.5% during the rate hike cycle.
  • In only two of the eight cycles did AGG have negative returns.



  • In the one-year period leading up to rate hikes, the MSCI EAFE Index delivered an average return of +25% vs. a historical +11% during rolling 12- month periods (not leading up to a rate hike).
  • During rising rate periods, the EAFE index posted a 14.5% average compound rate of return.
  • In the year following rate hikes, foreign stocks returned +11%.

Presidential Cycles

Fortis avoids making short-term based decisions on current events. You should be intellectually focused on the presidential elections, but we would not recommend making investment conclusions based on your favorite party or candidate.

According to Stock Trader’s Almanac, since 1833, the Dow Jones industrial Average has gained an average of 10.4 percent in the year before a presidential election, and nearly 6 percent, on average, during the actual election year. By contrast, the first and second years of a president’s term tend to be less robust: 2.5 percent and 4.2 percent, respectively. A notable recent exception was the election year 2008 coinciding with the global financial crisis. That’s when the Dow sank nearly 34 percent. (NOTE: Returns are based on price only and exclude dividends.)

As you can see in the chart below, one-year lagged returns for the two major parties are almost identical.


Here is an image of the the Presidential cycle, an imminent threat is not supported by historical data.



As most of you know, we encourage intellectual engagement at Fortis. The upcoming election and the interest rate cycle are certainly worthy of your attention and due diligence but we would not recommend making major portfolio decisions around “what if” scenarios. Let’s stay focused on a potential bear market caused by global conflict, recession or credit bubbles. Almost everything else is just short-term noise.

We are more concerned about the Deutsche Bank crisis right now that we are about the Trump vs. Hillary debates. A collapse of the venerable German banking behemoth would cause unknown ripples throughout the global economy. But for now, we stay the course.


“Yeah, sing with me, sing for the year
Sing for the laughter, sing for the tear
Sing with me, just for today
Maybe tomorrow, the good Lord will take you away

Dream on
Dream on
Dream on”
— Aerosmith “Dream On



Investors Screaming “Gimme Shelter” by Moving into a More Expensive Asset Class

Gimme Shelter
The Rolling Stones

Oh, a storm is threat’ning
My very life today
If I don’t get some shelter
Oh yeah, I’m gonna fade away

Key Takeaways

  • The demand for bond funds relative to stocks is believed to be the highest on record.
  • When you look at all historical stock market highs, we don’t normally see the level of individual investor pessimism that we see today.
  • Stocks are not necessarily over-valued today—and bonds are not necessarily a safe haven.
  • Let research and academic history be your guide—not your emotions.

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The World is Ending Again, Not so Much Again

Most people think investing is about the numbers, get the math right, but your money is really about the 7 inches in between your ears. Investing is psychological exercise filled with land mines based upon your personal biases.

The 2008 crisis caused the longest recency bias in history, the economic and emotional scars ran so deep, that investors are still carry their “crash binoculars” around their necks. The problem is those binoculars around their necks are choking off their long term returns.

Recency Bias tells us we’re inclined to use our recent experience as a baseline for what will happen in the future, the truth is that crashes are rare events, but corrections and volatility are frequent occurrences.

The S&P is now 221% off lows, but the green arrow on below chart shows the 16th correction of 5% or more in this secular bull market. During all 16 pullbacks, the internet was full of stories that the next 2008 was at hand—Greece, Brexit, China debt, Oil crash, etc.

Sensationalism is good for the media, but bad for your portfolio, discipline is good for your life and great for your finances, so make a plan and be disciplined. As the Godfather of value investing, Ben Graham said that “the investor’s chief problem-and even his worst enemy-is likely to be himself.”

Chart courtesy of Doug Short Blog.