Why I'm Not Blogging

I've been at this since July 2006, doing my thing. Writing when I've felt inspired, irked, righteously indignant, touched, happy and sad. Blogging has become a significant and meaningful part of my life, one where I am able to express myself on my terms, write about issues rattling around in my head, and to connect with people across the world and from different walks of life. Discovering blogging has truly been a gift. It is hard to imagine living without my blog.

Then why am I less interested in blogging than I've been in nearly three years? While I'm certainly not the most prolific blogger, I've created a veritable War and Peace of content during my blogging career. 2-4 times per week, very consistently, with a few 2-week "vacations" and some jags where I've written nearly ever day for weeks. But I can honestly say that I've never felt less interested in writing than right now. I generally keep a list of potential topics and I currently have stuff on that list, but whenever I look at it I think, "That's work." Blogging has never been work to me, so that kind of feeling is both unpleasant and scary. Have I lost my inspiration? Has my well run dry? I have written a lot about a wide array of topics, and my writing tends to be pretty intense and detailed, not little pithy entries or linkfests, so maybe I'm just spent. Or maybe...something else is going on.

I know my feelings have to be anything but unique, but I am mainly interested in the "why." Has anything changed in my life over the past, say, three months, when the frequency of my postings has notably declined? Well, after passionate and enthusiastic writing about the economic crisis, the Obama Administration, the Treasury, Paulson, Bernanke, etc. I just got tired. Is it because of the "bear market bounce?" Maybe. Is it because I don't want to simply write derivative crap of the stuff I've written previously? Possibly. Is it because I don't feel anyone gives a shit what I say? I'm sure that plays a part in it, too. I tried really hard for a period to be heard by those in Washington, in positions of power, but to no avail. There were plenty of voices to be heard, and mine simply was not one of them.

But there has been some other stuff that has been going on as well. I've never worked harder at my investment business, IA Capital Partners. Between working on new investments, my Board commitments (which I take very, very seriously), some advisory work with some of my companies and considering taking some outside capital, it has been pretty time consuming. Also, my trading company, Kinetic Trading, has been taking lots of time. I've been very focused on building this business, and it has been going very well. Starting something from scratch is hard, and making the transition from a "virtual" company to an organization with a home base, employees, strategic partners and outside capital is very exciting but a tremendous amount of work. Finally, I've been super committed to my boys and their love of baseball. Coaching my older son's team and supporting my wife in her coaching of my younger son's team (and acting as their pitching coach) is a labor of love in the Spring, but man, does it take time. No complaints, but I feel as if I spend 50 hours a week on my feet. Oh, and then there is my Board work for my kids' school, Little Red School House/Elisabeth Irwin High School (LREI). Again, a labor of love and something I deeply believe in (progressive education, humanism, providing opportunities to children across the socioeconomic continuum, etc.), but I chair the Finance Committee (making me Treasurer), am a leader in fund-raising and other stuff. In short, I'm in pretty deep.

So when all of this is mushed around, I think my lack of interest in writing has less to do with time (I've never had any, anyway; I've always just created time to write somehow) and more to do with lack of mind share. My brain is pretty stuffed with all my current interests and responsibilities, and I simply don't have the opportunity to contemplate my navel and think deep thoughts right now. My thinking is much more task-focused, much more project oriented. And since my blog isn't a business for me, it is a passion and an outlet, I'm simply not compelled to write. It's sad, but true. While this is my current state, I am hopeful that when things calm down I'll once again feel the inspiration and have the mental capacity to get back to it. On a certain level I feel guilty about not writing; I feel like I'm letting my readers down. But even more importantly I simply miss it. I miss the feedback, the dialogue, the back-and-forth, the spurring of new ideas that come from those who comment on this blog. And if I don't write, I completely miss this dynamic.

In the immortal words of the Governor of California, I'll be back. I just wish I knew when.

The Quants Must be Crazy

As a number of historically top-ranked long/short managers have decided get out of the LP game, there is another pocket - a quieter, more stealthy pocket - of the hedge fund universe that is heating up to bubble-like proportions: high frequency statistical arbitrage trading. Where long/short managers were once the kings of the hill, the AUM titans that could move markets with the mere awareness of their interest in a particular security, the secretive, underground, geeky uber-quant crowd is now being feted by top shops looking for talent. Hedge fund strategies rise and fall in favor in a cyclical manner, as "hot" strategies become over-crowded and returns get compressed, while those out-of-favor are fertile ground for some truly differentiated alpha generation. Then those shunned strategies attract new assets while the previously desirable lose assets. And so it goes...

Generally, such strategy shifts are a function of alpha opportunity: investors will generally tilt towards strategies that can generate the most alpha in the current environment, and since investment conditions oscillate strategy allocations oscillate as well. But there is a new factor weighing on investors' minds (and pocketbooks) that is having a pronounced effect on strategy allocation: liquidity. Among the universe of hedge fund strategies, which is the one that has the best liquidity profile? High frequency stat arb.

With signal horizons measured in sub-seconds, minutes or sometimes hours, these strategies trade highly liquid instruments long and short and generally will end the trading day at or near flat. Money is made through rebate capture strategies, rapid-fire pairs trading and the like. They good high frequency books tend to have Sharpe Ratios that are multiples of those of long/short and relative value strategies, specifically because the volatility of these strategies is muted due to the microscopic holding period. But this gives rise to the big drawback of high frequency stat arb - massive capacity constraints. In general, these strategies don't scale well, and as the frequency goes up (with "ultra high frequency" being the moniker for the most silicon-intensive, millisecond holding period strategies) the capacity tends to go down. Books of $10-$20 million are not uncommon, and it is hard to build an ultra high frequency book north of $100 million. This compares to the multiple billions that can be profitably run via a value-oriented long/short strategy, where much more concentrated positions and much longer holding periods rule the day. But in today's environment, this is not what investors want. Long lockups and high volatility? Out. Short redemption periods and low volatility? In.

And investors are willing to grant much higher payout to such strategies, and for good reason. Gains are losses are realized daily, not weekly, monthly or yearly. The mismatch between strategy holding period and the payout of incentive compensation is the driver of the backlash by LPs towards many of the premier long/short funds, and it makes sense. If your strategy has a holding period that is 18-24 months, should incentive comp really be paid quarterly? There is no rational argument for why the industry has grown up this way, and my guess is that this feature will, over time, come to an end. Both the timing and level of incentive comp needs to be calibrated to holding period - when these finally come into line, there will be a true alignment of motives between GPs and LPs.

But back to the high frequency frenzy. Of course, there is no free lunch. The influx of capital into what is a fundamentally capacity constrained strategy will compress returns and strip the alpha out in short order. And unless these funds amp up leverage as they did in 2007/08 to try and keep returns constant while spreads were compressing (which is what contributed to the quant fund blow-up), capital will necessarily flow out and into strategies previously tossed to the side where alpha once again exists, e.g., long/short. This is simply the nature of things. But for the hedge fund industry to rebuild its asset base and develop a healthy relationship between managers and investors, the timing and level of fees has to match the strategy. A "one size fits all" approach is neither appropriate nor desirable. It's high time the LPs asserted their power and the GPs grew a conscience to do the right thing for the industry.