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Niels Jensen Bets On Illiquidity

Tyler Durden's picture





 

There is nothing too remarkable in Absolute Return Partners' Niels Jensen's latest letter: it does a good compilation of a recent letter by James Montier posted previously, and juxtaposes it with textbook precepts from the discredited Market Portfolio Theory, in terms of what makes a good investor. Well, indeed: if one does everything correctly according to what works in a textbook definition and combines it with real world success, one will certainly end up making money. On the other hand, Jensen does have an actual trade recommendation: and it is go illiquid. "My favourite example right now is illiquid as opposed to liquid investments. I strongly believe that less liquid investments will outperform more liquid ones over the next few years for the simple reason that the less liquid ones are struggling to catch the attention of investors who, still smarting from the deep wounds inflicted in 2008-09, stay clear of anything that is not instantly liquid. This has had the effect of pushing the illiquidity premium (i.e. the extra return you can expect to earn by investing in an illiquid as opposed to a liquid instrument) to levels we haven’t seen for years." We wonder how ARP will fare if and when the markets seize up once again. But there's at least a few milliseconds until HFTs blow a fuse next and crash the market yet again.

Full letter:

ARP

 


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Tue, 04/05/2011 - 09:57 | Link to Comment IBelieveInMagic
IBelieveInMagic's picture

That is exactly what the Feds are betting on -- they expect the players who made out well on the stock market to diversify and mop up the real estate assets that are lying around...

Tue, 04/05/2011 - 10:23 | Link to Comment Zeno of Citium
Zeno of Citium's picture

I can't believe these guys are so lacking in general knowledge ... "the earth is only 2 billion years old" they say !!? WTF did they go to school for ?

 

Or maybe that's another new american fad on "intelligent design" in geology for a change or what not ... Other hypothesis: these guys got one of those brainwash PhD in economics. Like good ol' bankstas.

Tue, 04/05/2011 - 12:06 | Link to Comment DavidC
DavidC's picture

Any fule no it is only 4,000 years old...

DavidC

Tue, 04/05/2011 - 10:00 | Link to Comment IBelieveInMagic
IBelieveInMagic's picture

Duplicate

Tue, 04/05/2011 - 09:59 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Pretty weak risk analysis.  What is the trade here?  Someone break this down.

Tue, 04/05/2011 - 10:09 | Link to Comment equity_momo
equity_momo's picture

Buy the dog.   Thats the fundamental analysis.   And to Mr Jensen and his clients : good luck with that.

Tue, 04/05/2011 - 09:57 | Link to Comment Clueless Economist
Clueless Economist's picture

I believe in being liquid.  That is why I have been stocking up on Vladimir vodka at my rural mountain cabin (in addition to silver and ammo)

Tue, 04/05/2011 - 09:59 | Link to Comment umop episdn
umop episdn's picture

Good call, as you have both sides of the trade covered. What could possibly be more illiquid than barbarous relics like glod and sliver?

Tue, 04/05/2011 - 10:08 | Link to Comment JackieTreehorn
JackieTreehorn's picture

Vladimir sucks.

Tue, 04/05/2011 - 10:03 | Link to Comment Revolution_star...
Revolution_starts_now's picture

I think it's time to start building a long term double short etf portfolio, SDS, DXD, QID and maybe even FAZ?

Hold for longer than a year. SDS is at 20, down side is what 5 to 10 bucks? upside? 120 maybe more if the truth can get it's pants on. They are starting to look like the double long ETF's did in March 09. Nobody wants them, you don't get many chances to hold these kind of names for longer than a year with a 50% downside risk and a 5X upside risk. I think it is an idea whose time has come.

Tue, 04/05/2011 - 10:33 | Link to Comment thedrickster
thedrickster's picture

Theta, calling Theta...line 1.

Tracking error, calling tracking error line 2.

The former is acceptable, the latter on the other hand requires a Fukishima like dose of Gamma to avoid losing your ass.

Why not just buy LEAP puts?

 

Tue, 04/05/2011 - 10:55 | Link to Comment equity_momo
equity_momo's picture

Terrible idea to play leveraged ETFs for more than a few hours/days.

Tue, 04/05/2011 - 10:02 | Link to Comment IBelieveInMagic
IBelieveInMagic's picture

Triplicate

Tue, 04/05/2011 - 09:59 | Link to Comment savagegoose
savagegoose's picture

i got a 2$ million  mansion thats pretty illiquid he can have that for cost

Tue, 04/05/2011 - 10:01 | Link to Comment Milton Waddams
Milton Waddams's picture

"When you begin your missive with a quote, you confirm your status as a poser" - anonymous text field

Tue, 04/05/2011 - 10:50 | Link to Comment falak pema
falak pema's picture

depends on the pose...if its humble...no problem!

Tue, 04/05/2011 - 10:04 | Link to Comment Revolution_star...
Revolution_starts_now's picture

double post

Tue, 04/05/2011 - 10:05 | Link to Comment TruthInSunshine
TruthInSunshine's picture
Niels Jensen Theory = Thread The Needle

So, he's basically saying go and lock your money up in thinly traded (if at all) markets, and he'd probably argue the higher the beta the better, too.

Genius.

That was a great read. I am off to my Unicorn Ranch now, as it is near feed time, and unicorns need their Earl Grey Tea & Skittles to thrive.

 

/sarc

Tue, 04/05/2011 - 10:07 | Link to Comment Stuck on Zero
Stuck on Zero's picture

There's no such thing as an "illiquid investment".  Bright fellows on Wall Street always create new trading schemes, ETFs, funds, and investment pools to allow trading in illiquid investments. 

Tue, 04/05/2011 - 12:24 | Link to Comment falak pema
falak pema's picture

are you trying to say there are no frigid women...as a human comparison?

All it takes is snake oil and a snake charmer!

Tue, 04/05/2011 - 10:25 | Link to Comment prophet
prophet's picture

Nothing new here.  More wealth is creating by starting and running businesses than by investing in ponzi pieces of paper.  In fact the creation and passing of that paper in exchange for a share of those businesses is the liquidity event for the creator of the wealth.  

Tue, 04/05/2011 - 10:36 | Link to Comment Jaminio
Jaminio's picture

I take no investment advice from someone who has blown up a fund - see ARP Structural Alpha Fund.

No wonder he likes illiquid's, his investors can't redeem even if they want to!

Tue, 04/05/2011 - 10:43 | Link to Comment In Fed We Trust
In Fed We Trust's picture

"The music has stopped."

Soros

Maybe people are waiting for an encore? 

Dun No

Maybe a better name for "illiquid" investments would be "sticky" investments.

After all illiquid sounds to much like liquid, and could easily be confused over the phone talking to a broker.

That would suck, but calling it "sticky" like sticky buns investment, then you know your locked in, like a fly on a sticky bun.

Wall St also creates "Special Investment Vechiles" for that really toxic stuff, which also happens to be "illiquid", and they send it off to the Cayman Islands somewhere. 

This stuff is so special it's not even in the "off balance sheet books."

Tue, 04/05/2011 - 11:02 | Link to Comment Bruce Krasting
Bruce Krasting's picture

Talk about illiquid. Friend calls this morning to bitch about his real estate woes. Four, repeat four, fucking years trying to sell a high end home in S florida. If jensen thinks illiquid is hot, he should buy some RE. You can't sell it for love or money.

Tue, 04/05/2011 - 11:25 | Link to Comment SwingForce
SwingForce's picture

A remarkable New & Fresh brand of bullshit.

Tue, 04/05/2011 - 11:52 | Link to Comment SwingForce
SwingForce's picture

A remarkable New & Fresh brand of bullshit.

Tue, 04/05/2011 - 13:17 | Link to Comment narnia
narnia's picture

This is a focus on the foam rather than look at the wave analysis of investing.  It's macro b.s.  It's time to revisit micro.   

Fundamental 1: the currency of pricing needs to be sound.  when this is in question, as we are now seeing, it's a glorified dart throwing contest.  too many entities out there are creating currency out of thin air & moving them in and out of soverign jurisdictions.

Fundamental 2:  currency should be lent by people who understand the pricing & business of those to whom they are lending.  depositors can be protected, but that protection should not be 100% so they can provide a level of consumer control on bankers. 

Fundamental 3: currency should be invested in equity of a company by people who understand the pricing & business of those in whom they are investing.  they also need to fulfill their stewardship function (not let management stack boards & disproportionately tend towards selfish short term horizons). this should not be the job of a regulator who knows jack squat about anything has that responsibility.

Fundamental 4: the legal structure should have no mandatory supply of funds to lending or investing in certain asset classes, which disturbs and misprices investments.  

Fundamental 5: the legal & fiscal structure of whoever is in charge of the rule of law (government, most likely) should not overprotect industries via subsidies or changes in political structures that add dramatic changes in risk & reward.

Fundamental 6: foreign entities should be treated as foreign entities.  domestic entities should be treated as domestic entities. 

Wed, 04/06/2011 - 00:23 | Link to Comment compound interest
compound interest's picture

didn't read the whole pdf, just the intro of the article, but the main idea is not that bad, i think.

betting on illiquidity is shorting the crisis. maybe the crisis will end on one day (2, or 3 years from now), and _some_ illiquid investments can be a good bet.

it is also about accepting the fact that you can't get out in time even from the most liquid assets - look at jpy, for example, or stocks. algos kill you in nanoseconds, so why be in "liquid" assets? are they liquid enough to get out of them fast enough? flash crashes show us that they are not.

of course, i know the answer that seems to be the answer for every question nowadays: gold, pms etc. but nowadays everybody buys gold and silver. a smart investor always tries to seek what lacks the attention of the masses at the time. it does not have to be a "financial asset", it can be anything that makes sense. i'm not comfortable with "financial assets", etfs etc., because i don't trust charts and numbers on a screen nowadays. but the endless, crazed hunger for pms does not make me comfortable, either.

the whole Fed-thing, QE, the endless printing of zeroes, the manipulation of the yield curve, and the fragility of the global financial system seems to make it a valid decision to go in pms. but it is really clear that all those investors long on pms share all the psychological characteristics of a real market bubble. if pms go up, then they buy. if there is a correction, then they buy, because then they say: "buy the dip". no matter what happens, they just buy and say: "gold, bitchez". how long will it still make sense, i'm not sure.

Sat, 04/09/2011 - 21:28 | Link to Comment thames222
thames222's picture

I love Jensen, I've been following his advice on illiquidity for years and it's payed off marvelously.  Investors who place too high a priority on liquidity are really setting themselves up for failure, be patient and wait for good things to happen with your illiquids, it's a formula for success every time.

 

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