Sat, 01/10/2005 - 22:00
The buzz words over the past two years have been the 'new economy', the 'internet and the 'dot com' boom. This innovative area of the investment arena has stolen the limelight away from the traditional quality investment funds that are sometimes considered long term, staid and boring. However, most of the time these funds are profitable!
Whether one believes personally in the 'new economy' or not, there can be little doubt that it has been an exciting area in which to invest during the last two years. Equally, there can be little doubt that the more traditional areas of investment, whether equities, bonds, or derivative funds, have suffered as a result. Many older investment managers considered now to be 'too conventional', have shaken their heads in disbelief over the valuations of e-commerce companies that have never produced a profit, and moreover, show no signs of doing so in the near future.
In contrast to the recent successes achieved so far by investors in dot-com companies, the alternative investment fund industry has seen many of its larger managers losing money. Past 'stars' such as Julian Robertson have closed down their funds, whilst others such as George Soros have had to admit to errors of judgement over market conditions. Many have also been slow to understand and invest in the 'new economy'.
These investment fund 'stars' have many decades of investment experience making millions of dollars. However one of the inherent problems associated with investing in these managers is that they are 'single manager' funds. performance of these funds can actually deteriorate as money under management grows. Why? Well because all markets only have a certain capacity to absorb so much investment capital. Managers who have grown so big that they have to expand their trading into other new market segments i.e. areas where they have little or no experience may not always work as well.
Past success does not necessarily imply a continued record of success. Some managers are now trying to invest in markets that are smaller than the funds that they manage, thereby creating a potential capacity problem. Diversification by these managers into other markets is sensible and relieves the capacity problem, but only IF they have sufficient experience of these new markets.
One of the strategies that I have always found to be useful is hedging one's bets, or diversifying investments. 'Old hands' in the investment community have long known the benefits of a diversified portfolio for reducing risk. For Platinum Capital Management, a London based offshore investment fund specialist, diversification is the key to long term success. Diversification into many different asset classes controlled by many different investment managers can create good performance as funds under management grow. These investments can then subsequently be protected from unexpected market movements.
Diversification and its technical counterpart, Modern Portfolio Theory, is the key to all of Platinum's portfolios. If a portfolio is designed with good 'risk adjustment', it is possible to decrease volatility (risk) and increase overall returns. Analysts and managers have long known that risk and reward go 'hand in hand'. Platinum's funds aim to use sophisticated and analytical techniques to design risk-adjusted portfolios, in an attempt to trap high levels of investment returns without, at the same time, trapping high levels of investment risk.
Platinum's Equity Plus Fund effectively eliminate some of the key risk factors.
By having sixteen managers in a fund who have a very low correlation to one another, the investor is not exposed to the possibility of one particular manager putting the entire fund at risk. With these managers trading over many different markets, the investor is also not dramatically exposed to one individual market crashing. This risk-adjusted design process is the backbone of Platinum's Global investment Strategy.
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