The Technologized Investor by Ashby H.B. Monk

Author:Ashby H.B. Monk [Monk, Ashby H.B.]
Language: eng
Format: epub
Publisher: Stanford University Press
Published: 2020-11-15T00:00:00+00:00

CHAPTER 9

TECHNOLOGIZED RISK EXPOSURE

Avoiding Traps

Superheroes are forever lovable, but there’s something about them that’s unendingly aggravating: their penchant for falling into traps. Sure, taking risks is just part of the gig for any superhero—much as it is for any Investor. But there’s a difference between braving danger and being lured into unfair fights with arch-nemeses. Rather than using their superpowers to battle their way out of traps, why don’t superheroes try harder at using their special abilities to avoid traps altogether? Yes, yes . . . we know that’d sell less tickets at the box office, but it’s rough watching them repeatedly fall for it!

Of course, there are plenty of situations where superheroes aren’t cluelessly blundering into a trap: they’re well aware of what they’re walking into, but their heroism kicks in and they don’t see any other way. We’ve often witnessed similar scenarios with Investors. They exist in a system that’s rigged against them—with traps. No, we’re not being melodramatic in calling them “traps.” There are a few defining features for any trap: (1) it’s easier to get into than to get out of; (2) there’s a lure, or some camouflage that makes downsides seem less bad or altogether nonexistent; and (3) there are one or more mechanisms meant to put the victim at a disadvantage. Is it any coincidence that many fee structures and LP-GP arrangements seem to tick all those boxes?

We’re not naïve. We know Investors aren’t oblivious when entering into such agreements. But we also know that in most cases they share superheroes’ sentiments and feel they don’t really have another choice. Our overarching objective in this chapter is to help in shattering that illusion.

“Hold on,” you say. “It makes sense that evading traps is part of ‘risk management’ for superheroes, yet why so for Investors? For them, isn’t sidestepping traps a matter of cost control?” Actually, it’s part of a much broader concern: resource preservation. The traps that lie in wait for Investors all turn out to steal resources from them. Money is stolen in the form of unfair fees, while flexibility and control are sapped through lengthy, asymmetric LP-GP contracts (and most other forms of fund subscription). Time is exhausted in the extensive search, diligence, and selection efforts that go into picking external managers. More time and money get torched in paying consultants for benchmarking managers’ performance. Opaque, underinformative reporting prevents much-needed transparency. And marketing messages steal confidence (à la “You’re not equipped to handle the intricacies of markets. But our systems can! Now, be a good Investor and sit yourself down over there. Thaaat’s it. . . .”).

These are all traps that waste and pilfer resources that could otherwise go to risk management. Skirting traps has everything to do with managing risk. And there’s another resource for risk management that the present system steals from Investors that’s more valuable than any other: exposure purity.

Exposure Purity

As we took pains to show in the previous chapter, for Investors, being responsible in how they control risk

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