I was recently speaking with a pension officer, and asked him about investment opportunities he was looking for. He replied “Well, we are actively looking for a good emerging markets fund”.
The investor was interested in emerging markets because he believed they have significant appreciation opportunities uncorrelated to the U.S. market. He cited specific data that demonstrated the potential.
The answer was thorough and well-researched, but it still begged the question: Was he looking for an emerging markets fund, or was he really looking for uncorrelated opportunities with significant appreciation potential (criteria which he believed emerging markets happened to satisfy)?
The distinction is important. I speak with a lot of investors who ask for specific strategies by name. All too often they are searching for characteristics that can be satisfied by more than one thesis. The problem is there is no easy bucket in the portfolio for “significant appreciation potential with little to no correlation to U.S. equities” so people don’t generally ask for it by name. Furthermore, when people develop a thesis, they often get tied to it and lose focus on the original problem the thesis was meant to solve.
When helping investors, I always try to ask more questions and get to the deeper layers. Why are emerging markets attractive specifically? What characteristics make them appealing? What need do they satisfy in the portfolio? If a fund fits all of those needs but is not focused on emerging markets, could it still be considered attractive?
On the capital raising side, I have seen how funds that ‘check all the right boxes’ raise the most capital. Unfortunately, if a strategy checks all the right boxes, it’s highly likely that it has or will be crowded with capital by others who believe in the same boxes. The best opportunities I’ve found have been harder to define, often because competing investors don't have a clear place for them in their portfolios (where do you put electricity node arbitrage, trade-claims, mutual fund timing arbitrage, et al?)
As an investor and an allocator, it’s critical to understand what you really want, and to uncover all of the potential opportunities. The industry has settled on arbitrary terms to describe different investment strategies (distressed, long/short, credit, event-driven, etc.) but don’t let them constrict you. Focus on the problem you need to solve, and allow for the possibility of many investment theses that can solve it.