Quantitative easing and herd mentality are the things of money manager nightmares, and they’re coming true.
Right now developed countries are finding themselves full of debt and derivatives, and investors on the outside waiting to pounce on a market rally, writes ValueWalk. When dealing with the unknown, following the pack can be tempting. Money managers are all hoping someone else knows what’s going on. But many hedge fund managers have voiced concern that the herd is following the central bankers as they buy up billions of dollars of government bonds, and liquidity is drying up. Elliott Management, like many other hedge funds, is sitting on a stash of cash waiting for the time to be right.
“We think it is strange that investors and citizens are willing to go along with thinking and assumptions that flow from unproven theories uttered by people with a recent history of missing the Big One,” the letter reviewed by ValueWalk said, referring to central bankers missing the 2008 financial crisis.
In reality, not everyone can be “special” in their investments if everyone else is doing the exact same thing. Writes Elliott:
“Following the herd and trusting policymakers and central bankers may be particularly dangerous considering these actors clearly did not provide any useful insights in real time about the most important investment phenomenon of our lifetimes: the descent of the global financial system into a state of unsoundness.”
The answer isn’t to follow the herd, or to put your head in the sand as others run forward, says Elliott. Investors need to be willing to think for themselves and deal with the isolation of pursuing something different. In Elliott’s case, the firm is patiently waiting for the herd to run away so that it can pick up new positions at a discount. Sometimes staying the course is the best approach.
We have a hard time reconciling these observations with the fact that stocks and bonds are trading at record prices, and with capital markets displaying an almost universal lack of real concern. We will, of course, stick to our knitting. Our trading approach has worked for Elliott for most of its 38 years of existence, and we are not about to change now.
Photo: Stacy via Flickr.