Throughout financial history, every bull market seems to be characterized by some new investment product or vehicle that captures investors’ fancy. Like housing bonds in the early 2000’s, mutual funds in the 1980’s, and junk bonds in the 1970’s, liquid alternative assets appear to be that vehicle of the current bull market.
Prior to 2008, alternative investments were primarily available to only endowments and institutional investors. However, in recent years, investment companies created mutual funds with the promise of bringing similar strategies to all investors. These funds have seen tremendous growth and broad acceptance as many investors and advisors have allocated to these liquid alternatives in an attempt to build more diversified, sophisticated and endowment-like portfolios. Unfortunately, performance of liquid alternatives funds over the last five years has broadly disappointed investors. Continue reading
The human race’s evolutionary wiring is a marvel: it has enabled us to avoid predators, feed ourselves and thrive in even the least hospitable parts of the planet. Unfortunately, the same wiring has made humans struggle as investors. Following age-old impulses of fear and greed, our species consistently behaves in a manner that often reduces our investment returns.
Ironically, our tendency to commit behavioral errors provides opportunity for disciplined investors to perform better and helps to inform Crestwood’s investment process. Crestwood’s investment process seeks to outperform the market over a full market cycle – with less volatility – by understating, and avoiding, common behavioral errors in the market. Indeed, our investment approach is designed to take advantage of the predictable, self-defeating behaviors of so many market participants.
Let’s look at a small sampling of the many innate hurdles to successful investing that typical investors must contend with:
Overconfidence: Investors systemically overestimate their knowledge and their ability, and the results can be unpleasant. In 2014, the S&P 500 index returned 13.7%–but the average equity mutual fund investor earned just 5.5%, according to research firm Dalbar. The discrepancy is explained by investors’ well-documented tendency to sell low and buy high. Additionally, high rates of “turnover”—holding investments for a short time, and then dumping them to buy others—demonstrates overconfidence that one investor knows more than others, even though historically low-turnover portfolios have outperformed high-turnover portfolios.