Steve Lockshin talks about what he learned holding liquid and private alts during the financial crisis
I'm Steve Lockshin, the founder of Advice Period and Vanilla. I've been in the investment advisory business since, I don't know, late 80s. So my introduction to alts was with a fund of funds, I want to say 1996. Citadel was the biggest position and did unbelievable. And for close to 20 years we had great returns and the fund of funds that we had selected outperform the benchmarks. They had lower volatility even on an after tax basis. The low vol ones did better than municipal bonds. So it was easy to add to our portfolio and a lot of places we would take a healthy chunk of the fixed income or low volatility assets and put them in low vol hedge funds. And I'll talk about hedge funds separately from private equity and venture, because I think they're two very, very different categories that were great. And as I said, in 08, we got punished a bit because what had worked for 20 years stopped working. And while 20 percent down wasn't the end of the world for those, it was not what clients expected. They expected kind of little to no loss and a decent amount of upside, but tapered upside in up upmarket. So the tradeoff was I'll get I'll have less upside, but I'll have more downside protection. So when that didn't manifest during that stress period, clients panicked and advisors panicked. And we all know the gates were put up and that created more stress. And so that what I really learned from that is education matters most with clients making sure they understand why gates makes sense to protect the people who are actually staying and why you should plan for illiquidity in your portfolio for the tail risk events.
Private equity and venture are very different area for me. I think people already accept that you're holding that money for a long period of time, that some of them won't pan out. They don't mind the loss, but when they put money in the long shore, they put money into multistrategy. They expect that things won't blow up on them. But the ultimate killer, the things that really stressed out relationships and caused a loss of clients were fraud and complete blow ups. And how do you protect against those other than diversification is one of the issues I think investors need to be aware of today.
That conversation would be a question of how much volatility they can handle, which is the emotional part. And so if someone is willing to trade off illiquidity for lower volatility, that might be an alternate solution. Just want to make sure they're paying attention to taxes, liquidity and blowup risk, because 2008 sure has some real blowup risk. So it's a function of the client. The math simple. It's dealing with the human emotions.
On the private side, the the data used to say you got to be in the upper quartile. The data that I've read in the last five to ten years has said just don't be in the bottom quartile. Now, the upper decile managers clearly have dramatically outperformed. But when you get to the big fat middle, there's not a big deviation. So I think size actually can help and it can hurt. So finding folks that are reputable, if I was dipping my toe into it, I'd probably go as one of the big players because there's not a lot of risk or someone who's putting together a lot of pieces. Start with more diversification, understand your liquidity, don't put it all in at one time. So have a plan to always have X percent invested and then make sure that it's over a five year period. You're constantly reapplying your dollars into the markets. Your allocation stays constant.