Friday, December 29, 2006

Alpha and Wealth Preservation

I can't help but laugh when looking at the ads that Google serves alongside these posts. Its not their fault. But still - the billionaire's secret? Ha! Like the average billionaire became a billionaire because of hedge funds.

And that is what I want to talk about in this post.

It seems to me that most alternative investments are tools of wealth preservation as opposed to wealth creation. Now, that is not to say there is anything wrong with wealth preservation. If you have it, you probably intend to pass it down to your progeny, or their heirs, or your favorite charity or whomever. That's all good and fine. Most people want to preserve their wealth, no matter how much or little they have. But the notion that hedge funds serve to make the wealthy extremely wealthier is lost on me. With the possible exception of hedge fund managers, I just don't see it.

Most of the billionaires that I can think of became wealthy from a business of some sort, an observation pointed out by John Mauldin recently. Not all, but most. That business served as the vehicle which led these people to alternative investment strategies/managers as well as asset protection systems, among other things.

I often get the feeling that people think that finding the right investment will automagically catapault one into the pantheon of the high net worth. For most people, however, it is is a slog. That slog may take more or less time for various reasons, but it is still work. Although I like investing as much as the next guy (hopefully, the next guy agrees), I remember stating early on that my portfolio is built on a somewhat aggressive asset allocation model that I follow rather strictly. No real science behind it, and not an exorbitant amount of trading. (But more than the average bear's portfolio, eh Boo-Boo.)

Now, when I am trading, I do seek alpha. Isn't that what we all would like from our investments - absolute, positive, risk- and inflation-adjusted returns as measured against a relevant benchmark? Most of the time, I don't hit it. I'm still learning. But that's where money management comes in. I'm playing with amounts that will sting, but not kill, me if they disappear. Sometimes I make the numbers, sometimes I don't. But real wealth won't come from this, not as things stand now. I don't consider a few million to be wealth - apologies to the millionaires I may offend with that remark. I personally want wealth - as in, *stupid* amounts of money. Enough to swim in like Scrooge McDuck! Enough that American Express gives me a card more exclusive than the Centurion, because I'm the only person on the planet with it! And I'm willing to work really hard for a few years to get there. I see it coming in fits and starts. A few million here, a few more millions there. Then a billion, then more billions. That's ok.

Here's something else to think about. For your average hedgie, isn't trading a job? I mean, I would hope they enjoy their job and that compels them to be outstanding at it, but it is a job. They report to their investment committees, investors, LPs or whomever. Its work. Its just work using OPM to generate the returns, and with a helluva compensation schedule. (Come on, how can you not like the idea of 2 and 20 or better?) But it is still a job.

I'm done with jobs, personally. I've committed myself to working my last job. While the alpha that hedge fund and private equity generate is nice, for me, its not the end all be all. I'm after real wealth. And for that, real work is involved. Seems pretty straightforward to me.

I think I might have been rambling. Hopefully, enough of a point comes through to make sense to someone. If not, that's what comments are for.

Until next time...

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