So much depended on fashion these days. Once, hedge funds and private equity were the places to be. Then absolute return funds. Commercial property had received more than a small following, too. Where were they all now?
Perhaps the real trick was to maintain the Kiss principle. Keep It Simple, Stupid had been drummed into him. Opting for plain vanilla funds had stood him in good stead. But then there were those meetings when an enthusiastic sales and marketing director had told him of the rich pickings if he took advantage of this new process or that new manager.
This was how the banks had got themselves into so much trouble. Senior bank officials agreeing to invest in complex products they could not understand with money they were not even sure they had.
The law of unforeseen consequences did play a part here. Diversification was meant to de-risk portfolios – for the banks as well as private individuals. Many of the products devised by the rocket scientists had been intended to reduce risk – not increase it. But, as LTCM had discovered more than a decade ago, performance correlation can be well hidden.
Then, the strategy of spreading risk across a number of different bond markets with arguably very diverse characteristics had proved insufficient when it turned out many of the same investors were also holding a similar mix. When the problems in Russia and the Far East hit, selling in one area swiftly translated to dumping stock in another, highly leveraged funds like LTCM had nowhere to hide.
Could it happen again, he mused? Well, arguably it had. This was the problem the banks had found. Mark to market is all very well but when there is no market, the price is a big fat zero. Thank heavens for his independence, he thought. The number of firms forced into a sale or merger at ridiculously low valuations was remarkably high. Perhaps that was what he should be doing – buying a distressed firm. Reluctantly, he picked up the pile of papers. There might be some ideas there.
Brian Tora (email@example.com) is principal of the Tora Partnership