As the markets became more volatile and uncertain, traders and investors who had broken free of the relativistic herd, embracing an absolute-return philosophy, continued to produce positive returns at a time when the majority of traditional asset managers were posting consistently negative returns (along with the market).
Because absolute-return investors measure themselves against the risk-free rate, rather than relative to a market index, they must be more flexible and nimble. They must have the ability to employ a much broader arsenal of investment strategies in order to achieve their goal of delivering consistently positive performance. This group can employ all styles across all capitalizations. They can also short securities, which creates even more opportunities and enables portfolio managers to exploit both overpriced as well as underpriced securities.
The end of the great bull served as the catalyst for a much more adventurous and entrepreneurial environment. In today’s atmosphere, it’s harder for the traditional money management firms to hold on to talented traders and portfolio managers, as the financial rewards for stepping out solo can be extremely large for truly capable individuals.
The firms that want to survive and prosper in the absolute-return milieu must adapt and find new incentives for attracting and retaining such innovators. An article in a leading U.K. newspaper, the Observer, reported that Dillon Read Capital Management, the new hedge fund unit established by UBS in 2005, earmarked $1 billion in bonuses for its first three years in business to ensure that it continued to attract and retain successful traders.
When the article appeared, there were only about 120 employees in that unit, which would work out, on average, to about $3 million per employee. It’s no wonder that we continue to see a steady exodus of portfolio managers from the traditional asset management firms toward those organizations that offer more challenging opportunities in the new world of absolute return.
Read More : The Rise Of Absolute Return Market Environment
