PA thread

akimon · Post by **akimon** » Sat Jan 24, 2009 10:27 am

Managing your PA is arguably much more important than our day jobs these days (assuming we still have one). Gone are the days where you can count on getting paid from work performance. Those lucky enough to get bonuses will be paid in the form of worthless equity or in some cases subprime debt.

Where do you put your hard earned moolah to get it working for you?

NeroTulip · Post by **NeroTulip** » Sat Jan 24, 2009 2:38 pm

Interesting, I have been thinking about this a lot in the last two years, and here are a few basic ideas. They probably appear simplistic, but in my experience most people get it totally wrong. My guesstimate is that half of the guys on the trading floor have lost more than half of their own money last year.

You should probably think about having sufficient liquid funds to live for at least 3 years with no salary, in case you lose your job, can't find another one, or want to do something else (open your own shop, go to med school, move to LA and become an actor, whatever...). These funds should probably be in cash or short term inflation-linked bonds in your domestic currency. Don't try to be smart with this part of your assets, just safe.

With the rest of your money, and hopefully that is most of it, you can afford to take risk and have a long term view, because your short term needs are covered by the safe part of your assets. You probably need to think hard about which currency you want to use to measure your performance. A good question is "where will I be living in 10 years?". This is the currency of your liabilities, so it makes sense to use it to benchmark your assets.

Now you need to take a wider view about investment risk than your usual banker. Long term risk is probably more about inflation, high taxes, defaults, currency devaluations, fraud and wars than underperforming the S&P. Diversification, liquidity and low leverage will help a great deal.

If you don't know what to do, why not try to find a few outside managers who are actually good with money? If they are competent, hardworking and honest, and have a significant amount of their own money invested alongside yours, good things tend to happen. You can keep some money to trade futures or spread bet if you have some strong views, but in my experience people worry too much about this and not enough about all the rest.

HTH

silverside · Post by **silverside** » Sat Jan 24, 2009 3:55 pm

imho - if you're a quant / trader you're being paid to manage a multi mm book , directly or indirectly - so micromanagina a PA is a bad idea - get the blend of ccy's and investment (index fund or cash) right and leave it alone...

fwiw i have most in index funds... in hindsight made some bad timing on fx / investment timings... but hindsight is a wonderful thing.

TonyC · Post by **TonyC** » Sat Jan 24, 2009 5:05 pm

> if you're a quant / trader you're being paid to manage a multi mm book , directly or indirectly -

> so micromanagina a PA is a bad idea - get the blend of ccy's and investment (index fund or cash)

> right and leave it alone...

unless, of course, a substantial part of your employment compensation is in restricted stock and you take an 8 figure hit before you are allowed to sell it.

if you are working for an institution as a trader, you are essentially long the market index [or maybe even long a levered market index] as a consequence of your job . . . your personal assets ought to be very conservatively invested

or you could always try to diversify away from the market exposure inherent in your employment by investing your personal assets in something that is orthogonal to the market . . . by say, playing the ponies

kr · Post by kr » Sat Jan 24, 2009 9:54 pm

btw tony, hope you didn't get too long that tier 1 paper... those were the days

sort of looks like supersenior for the p.a.

in terms of base ccy, I am really struggling with that since my comp ccy has fallen over in recent days - of course correlated with the stock price! Actually I'd think portfolio optimisation on a ccy basket isn't hard but most of us don't bother to do it.

i don't have much time to think about the pa but just making some conservative growth estimates on various ETFs and then choosing a low-vol basket has worked ok... basically I am down 15% instead of 45%, mostly b/c it is delevered via treasury ETFs. Of course now the long paper is correlated with the market so I'm happy I dumped it a couple of weeks ago.

the inflation part is pretty hard. intuitively i think inflation issuance is dangerous and if governments went all-out, they would blow themselves up. instead i suspect the indexation is gamed right when it matters, so that they can override the real delta. but in terms of avoiding wars or bank crises or currency crises... guess I'd prefer to trade / rebal the pa when those things loom than invest in anticipation - seems like you'd never do anything yieldy enough.

akimon · Post by **akimon** » Sun Jan 25, 2009 2:20 pm

I agree that just working in finance make you already very long the market index, no matter what you do and what markets you trade. I mean, even if you sucked, and the market is having a really good year, it would be relatively easier to find new employment, etc. So as financial sector employees it makes sense to invest a chunk for wealth preservation first as priority, into uncorrelated or slightly negatively correlated assets from the market, and then only invest any extras for punting and possible wealth accumulation.

I'm thinking it might be a good time to allocate a much bigger slice into precious metal sector, like gold. It should work well as a low correlation investment, and also as a hedge against both government collapse events and hyper inflation scenarios.

cabron · Post by **cabron** » Sun Jan 25, 2009 6:30 pm

Akimon: "Gone are the days where you can count on getting paid from work performance". By work performance you mean punting depositor's money and screwing pension funds and local govt etc.? Sorry couldn't resist.

Anyway, agree with you about increased importance of PA trading. Unfortunately I don't have any developed ideas.

I don't like precious metals. As an investment they seem medieval to me.

Above all : remember the secret password - bilosellhi.

kr · Post by kr » Sun Jan 25, 2009 10:37 pm

actually, the password is, and always has been, FIDELIO

And no, work performance didn't have to be a direct abuse of the system, no need to add any fuel to that popular delusion. If you want an easy example, financing for renewable energy projects is also getting pulled these days.

I have been looking to ratchet my commodities exposure, but even with gold, hedge fund activity has added such a huge technical overlay that I can't quite pull the trigger. That is probably also true of infra-related plays like CAT (or even BLK for that matter). I guess it's true that public-sector employment goes up when bank-sector employment goes down, maybe there is a clean way to play this but I haven't figured it out.

jaiman · Post by **jaiman** » Fri Jan 30, 2009 12:22 am

I read an article a couple of weeks ago about a money management firm that handles athletes. Because athletes have a very limited number of high earning years (potentially very high) this firm would start them out in money market and short term bonds. As their career progressed and they built more wealth a bit of the portfolio could be moved into equities (I think they mentioned a max of 50:50). That idea that athletes are really trying to build a nest egg for the rest of their lives got me thinking about personal accounts for people in banking or money management. As has been mentioned, for most people your comp is already correlated to markets already & a good portion of you pay is in shares so you have a ton of financial market exposure already. I’m thinking more and more that the athlete model is the way to go. Most people won’t be able to retire when their banking/investing career is over, but they may be able to build up a decent nest egg that can supplement the income drop they’ll have when they move on to their second career.

kronon · Post by **kronon** » Fri Jan 30, 2009 12:23 pm

And presumably house prices of where most of us live are correlated to markets as well. So our human, housing and investment capital is all tied to the market.

But when you're relatively young, is this really that bad? The problem most people have is that they're invested too heavily later in life and not enough earlier on. So to be leveraged up while young, and dial down the risk later on maybe makes better sense.

Few old people I know regret having invested earlier on in their lives.

Anyway, one thing that I notice seems to be pretty common is that alot investment people, quants especially, spend alot of time preparing complex and highly thought-out investment proposals and analysis for clients, yet when it comes to PA its rarely more then some ETFs and index funds. Its like the carpenter who has crooked cupboards. Or the car mechanic who drives an old reliable straight 6 instead of some over-engineered gadget overloaded tank.