I am reminded of the insights of two wise investors whom I met as a young analyst. My early career in the mid-to late 90’s was spent evaluating absolute return and relative value hedge funds, i.e. those strategies that were supposedly uncorrelated to the equity markets.
I presented to the first wise man, an English nobleman, a stable of these so-called managers for investment – convertible, merger, capital structure, mortgage and even commodity arbitrageurs. I presented well-structured strategies, with enviably consistent track records, aimed at making money in any environment. “Hmm”, he commented, “these are American strategies”.
This basically meant that they worked best (or only) when the dollar was strong, with positive real interest rates (i.e. CDs out-earned inflation) and robust financial activity, all of which allowed Wall Street’s alchemists to concoct various flavors of financial engineering.
The second wise man was a legendary yet secretive macro manager who ran a portfolio for a well-known hedge fund. He spelled out to us in great detail his then current investment thesis and positioning, where after he stated plainly, “I may change my mind tomorrow”.
We learn from them both that one cannot ignore macro-economic trends, especially during times of market stress, and that one must be willing to make active investment choices.