Saturday, 25 April 2015

Why go to a restaurant, if you can cook?

18:13 Posted by The Thalesians (@thalesians) No comments

It's a simple question, if you can cook why go to a restaurant? First, being able to cook something to ward off hunger is not the same as being able to cook a Michelin star meal. The latter takes years of training and is somewhat of an art. How deep is your repertoire of dishes and would it compare to a restaurant? For example I like to bake and often make cookies. I have made them so many times, that I know the various tips and tricks, to make them relatively well. This of course doesn't mean that I can miraculously move on to making cheesecakes to the same standard. I also can't somehow easily transfer my cookie making skills to burgers, which I would truly love to do.

The food is also not the only part of the restaurant experience. It is also about the environment of the restaurant and most of all, the company of your fellow diners. Also when we say a "restaurant", what do we mean. The standards of restaurants can vary significantly, as does the cost of them. Hence, treating restaurants as one homogeneous group seems wrong.

We ask parallel questions when it comes to investing. If we can invest in simple strategies such as long only index trackers, why go to a hedge fund, which charges higher management fees? As an example, my expertise is largely in the realm of systematic trading, primarily in liquid markets such as currencies. This does not mean that all of sudden, I can start trading some other unrelated asset class from a discretionary perspective, without a lot of training or effort. Baking cookies doesn't automatically mean we can bake cheesecake. Hedge funds give you this ability to make the leap.

Just as with restaurants, hedge funds are not all the same. The question suggests we are trying to group them together. This ends up missing the point. For one, the strategies that hedge funds employ vary significantly. Some might be long/short equity funds, others will be trend followers and so on. There can also be a large amount of dispersion in the returns of various hedge funds in a certain sector. Furthermore, even if we might be possible to replicate a modicum of a hedge fund's strategies, the details will always be more difficult to implement and time consuming to do yourself. A hedge fun is being paid to do this in a more efficient fashion. The flipside is that you need to do your homework when it comes to selecting a hedge fund.

There's a lot more to restaurants than just the cooking. There's also a lot more to investing in hedge funds, than an initial glance might suggest.

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interesting in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York and Budapest - join our group for more details here (Thalesians calendar below)

29 Apr - London  - Global macro & UK election panel - Eric Burroughs / Reuters, Mark Cudmore / Bloomberg, Jordan Rochester / Nomura, Jeremy Wilkinson-Smith / Independent & Saeed Amen / Thalesians


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