While driving to Neal’s birthday party last summer with the Dow at 12,000ish, I asked him where he saw the market headed and after explaining, as he usually does, “market guessing games are for fools, the strategies I’m interested in exploit market inefficiencies and use “edges”…he continued, “look, now’s not the time you should be trying to pick the bottom, there’s a lot of bad stuff we have to work through and you have to remember the Dow was just at 3,000 a few years ago”.
With that simple thought, Neal Berger inadvertently called the market top….as unthinkable as it was back then…
Neal is one of the smartest individuals I’ve met over the years, and I’ve met a lot of people…that’s why has only deals with a few rich ass clients, manages a great sized fund-of-funds, and he’s doing better than ever….learnnnnnn from him.
Check out the Q&A I recently did with him:
1. What’s your investment strategy and background?
I am an investor in hedge funds. I seek to invest in strategies and Managers that exploit a legitimate ‘edge’ or inefficiency in the market. I look for opportunities that are as close to a ‘sure thing’ as possible. In short, I seek to invest in strategies and Managers that have a positive expectancy.
As for my background, I was a Global Macro trader for about a dozen years with prominent firms such as Fuji Bank, Chase Bank and Millennium Partners hedge fund. I’ve been in the hedge fund industry for about 14 years now. I’ve been investing in hedge funds for more than a decade on my own behalf as well as on behalf of certain wealthy families and individuals. Currently, I have a hedge fund advisory firm that invests in hedge fund strategies such as Environmental Credits (Carbon Trading) creation & trading, Electricity Arbitrage, Shipping Derivatives, Option Market-Making, Natural Gas Basis Trading, Water Rights, and similar ‘niche-oriented’ strategies.
2. No matter that it’s not your strategy, given that you correctly called the top, where do you see the stock market headed in 2009 and 2010?
It’s not my game to predict where the market is going and frankly, it’s a losing game for anyone. I’m looking for businesses and situations where profits can be made regardless of market direction. Anyone who claims they know exactly where the market is going for 2009 and 2010 is either lying or an idiot. That said, we are in a bear market and the market has shown no evidence to the contrary. We have to play the existing trend until evidence strongly suggests otherwise. We are currently in the midst of a deflating bubble and we are suffering a major hangover. When you are drunk for as long as we were, it is unlikely that the hangover is going to be short-lived or pleasant. Once the market does bottom, there is no guarantee that there will be a V shaped recovery. The Japanese stock market is -80% over the last 20 years. A market recovery is not on my radar screen, however, we must always keep an open mind. In short, it’s not my game to worry about this.
3. Tell us about one of your cool market inefficiencies from which you aim to profit
Just a couple of years ago, we had to look at very exotic opportunities to uncover inefficiencies. There was so much money chasing so few opportunities that everything was largely saturated. This is why we got into ‘niche-oriented’ strategies that were largely undiscovered and under exploited. However, in recent times, the market has become so chaotic and frenetic that there are an increasing number of simple, more mainstream opportunities.
One brief example is buying the 6 month T-Bill and financing the trade with corresponding 6 month repo at a positive carry. Since the T-Bill is backed by the US Gov’t, there should be no securities with a corresponding tenor that have a lower yield. However, due to the large government bailouts such as TARP, the issuance of treasuries to finance these bailouts has increased dramatically. This has caused a temporary supply shock pushing yields above the corresponding repo. As far as I can tell, the risk in the trade is simply managing your prospective margin calls and a government default on 6 month T-Bills. Otherwise, it appears to be a pure arbitrage.
4. Give us some interesting investment vehicle to watch the rest of the year, why does it interest you?
Since I am an active investor in the strategy, I am very interested in Carbon/Environmental Attributes trading. The new Administration has promised action on global warming and Cap and Trade. Frankly, the global economic slowdown is probably the best thing that could have happened to the environment as it relates to greenhouse gas emissions. That said, I am very interested in following global and regional markets for environmental attributes such as Sulfur Dioxide (SO2), Nitrous Oxide (NOx), Renewable Energy Certificates (RECs), Wetland Mitigation Credits, etc. These are markets that have the potential for persistent inefficiencies. I am also very interested in following the Water Sector as fresh, clean Water becomes an increasingly scarce resource.
5. What are your favorite financial websites/blogs?
Frankly, I don’t read a lot or follow a lot of financial commentators/bloggers. I read Elite Trader sometimes when I am looking for a diversion. There are a few people whose opinion I respect and listen to. Namely, I listen to George Soros, Jim Rogers, Bill Gross and thoughts from major hedge fund managers. One always has to understand and appreciate any biases these individuals may bring to the table, however.
6. What advice do you have for my poor readers who just want to make an extra few thousand dollars?
There is no easy path the riches. If you have a very small capital base, it is unlikely that you will be able to turn that into something substantial within a short period of time. If you are doing this ‘part-time’, you are unlikely to be successful. Frankly, the overwhelming majority of those who do this ‘full-time’ are unsuccessful. My advice is to invest where you know. We all have expertise in certain areas and that is where the investing should begin. Don’t stray to far from your core competence. If one has a modest amount of capital, the most effective usage is to combine that with sweat equity and build a business. If one is looking for passive income, a typical asset allocation strategy combining low cost index funds, fixed income, and money markets are probably the way to go. Not too exciting but the fantasy of ‘get rich quick’ is merely that- a fantasy.
Posted in Q&A, Real Wall Streeters