DIANE HARRISON Getting Past the Taper Tiger

This article first appeared on December 5, 2013: http://www.hedgeworld.com/blog/?p=10027

Getting Past the Taper Tiger

rying to predict when inflation will rear its unpredictable head and to what extent is an exercise in futility, but one of the most popular topics among industry pundits. The Feds QE program has been active since December 2008, when interest rates approached zero. For the past 6 years, Fed officials have relied on bond buying and market signaling about their intentions to ease or not going forward to influence economic growth. As 2014 opens, this policy action has proven to be less than effective in spurring the economy. The mantra from the market has become, What next? and indications that there is no next in terms of policy plays are growing. As reported in Bloomberg Business News on 11/18/13, Janet Yellen, the next nominee to replace Fed Chairman Ben Bernanke in January signaled her concern: Now, this is challenging: Were in unprecedented circumstances, were using policies that have never really been tried before -- and multiple policies -- and were trying to explain to the public how we intend to conduct these policies, she told the Senate Banking Committee Nov. 14 at her confirmation hearing in Washington. So, it is a work in progress, and sometimes miscommunication is possible. (Bloomberg Business News, Fed Ponders How to Temper Tapering Without Rate Rise). The longer government intervention and policy plays tamp down interest rates, the less likely market norms will dictate what price moves occur and when. The laws of supply and demand have been effectively suspended for years, but eventually the pressure this creates will make itself heard. The taper tiger of inflation may be hibernating at present, but we will eventually hear it roar. WATER, WATER, EVERYWHERE, NOR ANY DROP TO DRINK So why add to the crowded discussion about what to do in the face of future inflation? Money managers and their investors are very concerned about defensive positioning heading into these uncharted waters. While how to make money is always a key objective in the allocation process, how to manage portfolios against unforeseen risks has become crucial to investors throughout the risk spectrum. It reminds one of Coleridges poem, The Rime of the Ancient Mariner: Water, water, everywhere, And all the boards did shrink; Water, water, everywhere, Nor any drop to drink. Within this context of uncertainty and general nervousness over the future secular direction in the market, it is clear that diversification should be a primary objective of all investors for the long term. Alternative investments are perhaps the broadest sector within which to add this diversification, as there are multitudes of approaches and markets to take advantage of in this category. As always, the key is to identify both approaches and managers that, together, add the balance of protection and performance each investor seeks. ALLOCATION TREPIDATION In wealth management, making a poor investment decision is typically more feared than making a tepid positive decision, and can cost wealth managers a client relationship if severe enough in its error. So moving investment allocations becomes an arduous process for both managers and investors in general, relying as it often does on hyper-analysis, long evaluation periods, and extreme manager selection criteria. This is one of the biggest challenges alternative managers face when entering the diligence process for allocation. Short of posting blockbuster performance numbers with nearPANEGYRIC MARKETING| DECEMBER 2013

DIANE HARRISON Getting Past the Taper Tiger

zero risk and a sterling record of well-established money management operations, most managers find getting checks written to be extremely difficult. More now than ever before, the time has come for the hackneyed phrase paradigm shift in allocation consideration. Todays market is nothing if not fickle; its usual dynamic forces are now inextricably linked to global fiscal policy interventions, which compound the market moves both short and long in ways that often defy logic and traditional analysis. There are few rules to contain the impact of government actions upon market dynamics, specifically because government behaviors are variably motivated and, therefore, largely unpredictable in the aggregate. ANY CHOICE SEEMS SCARY, BUT NO CHOICE IS WORSE In portfolio allocation terms, this translates to a growing need to protect against large downside moves, and that inevitably leads to a strong diversification practice. Alternative investment managers must capitalize on this need and aggressively go after the investors who are suited to their strategies. Understandably, this is not an easy task, but it is vital for both managers and investors. Alternative managers should take a hard look at their offerings and ask themselves the following: Am I offering something that works as a diversifying element? Am I priced competitively for the value/risk I bring? Am I structured to support the investor class I am targeting? Am I clear to my intended audience in communicating what I do and how I generate alpha? Am I accessible to my investors and their advisors for information, conference calls, and visits, if needed? Am I ready to follow up regularly with investors on the status and progress of my offering? Do I have a capacity cap and am I growing within that range?

If any of the above needs shoring up, 2014 is the time to address the weaknesses and build on a marketing effort for growth. There is absolutely an investor mandate to shift money into alternative structures and a desire to do so. THINGS FALL APART; THE CENTER CANNOT HOLD Written in 1921, Yeats poem The Second Coming described his view of the state of the world at that time. It depicts a frightening vision of chaos as the poems falcon, soaring in a widening gyre, loses connection with his falconer: Things fall apart; the center cannot hold; anarchy is loosed upon the world Flash forward to 2014, and, as the US government begins to shift away from the QE prop-up stance of years past, the taper tiger will begin to show signs of stirring. This uncertainty will create more pressure on wealth managers to moderate clients portfolio risk stance, creating additional opportunities for alternative managers to win over new investors.

Diane Harrison is principal and owner of Panegyric Marketing, a strategic marketing communications firm founded in 2002 and specializing in a wide range of writing services within the alternative assets sector. She has over 20 years of expertise in hedge fund marketing, investor relations, sales collateral , and a variety of thought leadership deliverables. In 2013, the firm was awarded IHFAs Innovative Marketing Firm of the Year, and AIs Marketing Communications Firm of the Year- US. A published author and speaker, Ms. Harrisons work has appeared in many industry publications, both in print and on -line. Contact: dharrison@panegyricmarketing.com or visit www.panegyricmarketing.com. PANEGYRIC MARKETING| DECEMBER 2013