Alt Blend

Over the past two weeks, I’ve realized that the first anniversary of Alt Blend blew right past us (it was officially October 14, 2020). So, happy anniversary-ish to us! Yes, it’s already been over a year of this mindnumbing blast of Alts goodness. Don’t worry, “meh” is the correct reaction. Moving on…

As we’re about to put 2021 in the record books, today’s edition of Alt Blend is an index (loosely speaking) intended to a) archive all of the posts-to-date to help you free up some precious space in your brain for the new memories you’ll be making in 2022, b) briefly recap everything we’ve talked about over the past year (ish) for easy future reference, and/or c) bring to light topics that you may want to pull from the archives to re-read (or read for the first time, in the case of newer readers). I’ll try to be concise and break it into palatable blocks of information. And it may very well be the boringest Alt Blend yet, so my apologies in advance. Here we go!

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Even if you don’t immediately recognize the name Edie McClurg, if you’re old enough to remember the 1980s and ‘90s, then you’ll almost certainly know her the instant you see her photo. Somehow she was everywhere and nowhere for the better part of my childhood, appearing in movies like Ferris Bueller’s Day Off, Mr. Mom, Planes, Trains, and Automobiles (a Thanksgiving classic for not-quite the whole family), and sitcoms including The Hogan Family. You can also hear her voice in several well-known animated films, like The Little Mermaid and Cars (so even my young daughters have familiarity).

Was she the star of the show? Never, as far as I can tell. Was she there time and time again as a very dependable supporting cast member? You betcha. She is even credited with the quote, “Acting isn’t a singular profession, it is a collaborative profession.” It takes a small army to create the shows and movies that have meant so much to us over the years (try reading the credits some time), and it seems Ms. McClurg embraced this notion.

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In the previous edition of alt.Blend, we discussed the due diligence process and some considerations involved in both investment due diligence (IDD) and operational due diligence (ODD). To expand on that topic, this week I am joined by Chris Hughes, Chief Operating Officer of Axonic Capital – a structured credit manager – to gain an inside perspective on ODD and the continued evolution of the due diligence process.

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In a recent edition of Dividend Café, David Bahnsen revisited the premise that economics is, at its core, the study of human action. It’s easily overlooked on a day-to-day basis, but the combined diligence of individuals in a society is what drives all of the economic growth and investment opportunities we experience. With this in mind, today’s quote applies not only at a personal level but also, more importantly, to our communities and society as a whole. We can all use a reminder to be grateful for the efforts of everyone else, as – without all of our collective efforts – the opportunity set for each of us would be diminished (or nonexistent).

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In The Big Short, Michael Lewis outlined the experience of a handful of investors who saw the red flags before the onset of the 2007-08 financial crisis and were determined to find ways to profit from the collapse. The meme stock phenomenon, which made for many salacious headlines earlier this year, once again brought short-selling into the limelight. The power of social media and retail-investor crowds were harnessed as a way to “stick it to the man” via a combination of Reddit and Robinhood, squeezing short-sellers out of their positions (with “the man” in this case being hedge funds trying to profit from the collapse of some struggling companies). More quietly, however, shorting stocks is a standard part of everyday financial markets and generally goes unnoticed by most investors.

Recently, a client inquired about the effects of investors shorting a given small-cap stock – particularly one that he believes to be a good business at its core. Should business fundamentals ultimately win out, or are common stock shareholders (aka “the longs”) at the mercy of “the shorts,” barring a coordinated effort ala Robinhood/meme situation to drive out the short interest? Frankly, I don’t know enough about the subject to provide a robust off-the-cuff answer, so my goal today is to research this topic and see where that leads us.

Here We Go!

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In our recent six-part series, “A Historic Blogpost,” we covered a number of strategies across the spectrum of private equity, debt, and other holdings. While some aspects of risk/reward were alluded to throughout that series, I think it’s worth examining the risk/reward continuum of the capital structure for additional context. Much of this topic isn’t only applicable to alternative investments. Still, it’s an important one for understanding many alts strategies – and it may even provide insights for the traditional part of your portfolio. With that, let’s build ourselves a capital sandwich.

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Alternative investments are not perfect. As we’ve covered thus far in this series (which has only touched on a tiny sliver of the alternatives universe), there exist many alts strategies that come in various structures, and there are always tradeoffs involved. After covering some of the disadvantages in Part 5 of this series, today we’ll try and finish with some of the advantages.

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In the first four entries of this “historic” series, our quotes focused on perspectives and lessons regarding history. Today’s quote, however, is a shift to remind ourselves of the importance of execution and the respect we must have for execution risk within private investments (and all investments, really). That’s because today, we’ll get a taste of some execution failures and the implications for the outcome of a given strategy. Here we go.

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Today, we’re continuing through the list of alternative strategies I’ve used on behalf of clients in recent years to reflect on and learn from the experience. In this update, we’ll begin covering funds that are restricted to accredited investors and, therefore, may include less liquidity than what we’ve discussed so far in this series.

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We were on a mission to find various strategies with improved characteristics vs. what we expected from daily-liquid investments; that difference would come in the form of less volatility with more income/total return and risk mitigation (ways of minimizing losses if things didn’t go as originally planned). In theory, this endeavor could provide a more consistent experience for clients through market cycles (“recession resilience”) while improving cashflow and long-term returns – especially in light of the (already at that time) low-rate environment in which we found ourselves.

Since not every client was a Qualified Purchaser, the goal was also to identify several alts that could be used for Accredited Investors or required no qualification. In addition, we needed to combine a variety of liquidity profiles to make the overall portfolio palatable. With this in mind – as we now explore each of these strategies – I will segment them by investor qualification, which will then loosely align with their liquidity profiles. Here we go.

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