Friday, February 24, 2012

Letter from Investment Management Firm Zilch Capital Sheds Light on Wall Street Practices

The Economist Magazine Invents a Better Mousetrap Satire

Many times this Forum is forced to admit that someone else does better what the Forum is trying to do.  In this case it is The Economist with an unreal communication from an investment management firm to its investors.  It is presented in full because it is to be enjoyed that way.

The lexicon of hedge funds

From alpha to smart beta

The industry’s language is changing

In line with the rest of our industry we are making some changes to the language we use in our marketing and communications. We are writing this letter so we can explain these changes properly. Most importantly, Zilch Capital used to refer to itself as a “hedge fund” but 2008 made it embarrassingly clear we didn’t know how to hedge. At all. So like many others, we have embraced the title of “alternative asset manager”. It’s clunky but ambiguous enough to shield us from criticism next time around.

We know we used to promise “absolute returns” (ie, that you would make money regardless of market conditions) but this pledge has proved impossible to honour. Instead we’re going to give you “risk-adjusted” returns or, failing that, “relative” returns. In years like 2011, when we delivered much less than the S&P 500, you may find that we don’t talk about returns at all.

It is also time to move on from the concept of delivering “alpha”, the skill you’ve paid us such fat fees for. Upon reflection, we have decided that we’re actually much better at giving you “smart beta”. This term is already being touted at industry conferences and we hope shortly to be able to explain what it means. Like our peers we have also started talking a lot about how we are “multi-strategy” and “capital-structure agnostic”, and boasting about the benefits of our “unconstrained” investment approach. This is better than saying we don’t really understand what’s going on.

Some parts of the lexicon will not see style drift. We are still trying to keep alive “two and twenty”, the industry’s shorthand for 2% management fees and 20% performance fees. It is, we’re sure you’ll agree, important to keep up some traditions. Thank you for your continued partnership.

Zilch Capital LLC

1 comment:

  1. This sounds like a business plan to me. Something like:

    I wonder if, in this jaded investment landscape, such honesty would fly? Somehow I doubt it. People still want illusions of blue sky. Even if in their hearts they know it's all illusionary.