Long/Short Equities Competitive Advantage
What is a true competitive advantage in L/S Equities?
Have you ever wondered what competitive advantages the best long/short fundamental investors have?
As the industry has become incredibly saturated and competitive, I have always been curious about what truly gives an investor a competitive edge. Whenever I had the opportunity, I made a point to go out of my way to talk to Portfolio Managers I had heard were extremely successful. Despite asking countless questions, I often came away from these conversations uncertain about what their specific competitive advantage was.
Even based on my own experience, it was never crystal clear what exactly set these investors apart. Their strategies and approaches often sounded familiar. And to be clear: I am referring to a high level of investors - those who have been in the industry for years, managed portfolios and delivered strong performance.
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In this post, I want to discuss the concept of competitive advantage in fundamental long/short equity investing. The discussion will be partly skewed towards multi-managers and low-net long/short strategies, but I believe the takeaways apply broadly across the industry. Why? Because investors who succeed under tighter risk frameworks and with less concentrated positions tend to perform equally well, if not better, in longer-term and less risk-oriented investment strategies.
The discussion will be helpful to you as you think about your own competitive edge as a fundamental investor and if/when you are choosing a Portfolio Manager to work with or work under.
Firstly, it is important to understand that most investors in the industry do not have a true competitive advantage. By a true competitive edge, I mean a lasting ability to consistently generate alpha. They don’t. This is why true longevity in the industry is so rare and you see so many people constantly jump from one firm to another. That’s okay. You really don’t have to have one to have a successful career from an earnings perspective. In many cases, having a few good-to-great years is sufficient.
So, what competitive advantage(s) do the best PMs possess?