Orin Kramer is Chair of the State of New Jersey Investment Committee and a General Partner of Kramer Spellman, L.P. managing private investment partnerships concentrated in public equities. He spoke the other day at a Managed Funds Association event in Chicago I attended. Some of his stark comments (paraphrased):
“When we drop 100 million in Microsoft over the course of a day, 14 million an hour, no one views it as a big deal. People accept the up and down, the volatility. But if a hedge fund drops 2%, it is a big deal. That is irrational.”
On screening out volatility:
“We expect hedge funds to be non-volatile. It is irrational. By doing this you screen out all investment opportunities where there is volatility.”
On correlation:
“Many of the people in the public pension world still don’t get that adding a volatile hedge fund component (not positively correlated) to an existing portfolio reduces the portfolio risk.”
While he did not say it expressly, Kramer’s words for me point to why opportunities like trend following will continue to exist. With so many billions upon billions tied up in pension funds and with those funds often run by a ‘herd’ mentality (i.e. not necessarily the brightest bunch), chasing benchmarks and chasing reputation risk (i.e. afraid of doing something different than the other guy who is scared too) will keep those unpredictable trends coming.