Introduction: Thomas D. Conrad, Ph.D. is currently a hedge fund manager and president of Financial Management Corporation. He received his Masters Degree in Accounting, Statistics, and Financial Management from The University of Maryland in 1961 and his Ph.D. in Business Administration from The American University in 1965, with emphasis on Securities Analysis and Managerial Economics. His Doctoral Dissertation, “A Statistical Analysis of The Results of Integrating The Use of Mutual Funds and Life Insurance in Financial Planning” was later published. Dr. Conrad has taught and lectured at seven universities, including The American Institute of Banking and The American Savings and Loan Institute. Dr. Conrad has held a seat on the Philadelphia-Baltimore-Washington Stock Exchange, and served in the Reagan Administration as Deputy Assistant Secretary of the United States Air Force (Financial Management). His website is www.worldfund.net
The Daily Bell: What is the World Opportunity Master Fund?
Thomas D. Conrad: It is our chief investment vehicle and an international hedge fund that operates globally as a fund of hedge funds. Fund managers hold in aggregate well over US$2 billion in managed investments. We’ve managed to accrue compounded annual returns over the past three years of 20 percent.
The Daily Bell: It has a high ranking.
Thomas D. Conrad: The Fund is ranked number nine in the world in certain categories by BarclayHedge and recently reached a number three ranking. BarclayHedge provides information services to the alternative investment industry and tracks over 12,000 alternative investment vehicles. Financial Management Corporation, (FMC), a 40-year-old Maryland corporation, is the General Partner of the Partnership that runs the Fund, and, as such, is responsible for the Partnership’s investment decisions.
The Daily Bell: Give us some background on hedge funds.
Thomas D. Conrad: The first hedge fund was started by Alfred W. Jones in 1949. Jones’s idea was that he would create a fund that would never take a “naked” position but would always alleviate risk by pairing one investment with another opposite one. In practice, this often meant investing in a stock and then selling it short at the same time.
The strategy worked and over time Jones’s ideas gained considerable attention. But despite success, the implementation of hedge funds gradually changed. Today hedge funds come in all shapes, sizes and strategies. The name hedge fund is more synonymous with non-traditional investment practices than with a specific “hedging” strategy.
The Daily Bell: It has been influenced by modern portfolio theory, as well.
Thomas D. Conrad: Hedge fund positioning has also been affected by modern portfolio theory that emphasizes asset classes over individual stocks. Though there is considerable controversy over MPT, it is generally accepted at least in academic circles that the majority of returns are generated by the asset not the particular instrument.
In other words, simply being invested in an index of stocks at the right moment in the business cycle can provide the manager with a healthy rate of return. Being invested in an asset class at the wrong time in the business cycle can produce considerable losses.
The Daily Bell: Neo-classical economics shows us clearly that a major driver of modern markets is the central bank. By fixing the price and value of money, central banks cause tremendous booms and busts. You take that into account, as well.
Thomas D. Conrad: Yes, during a boom period, people feel richer than they really are because the central bank has printed more money than is required. Business expands and equity markets in particular perform strongly. At this time, interest rates begin to rise and the boom slows and then stops, often with a spectacular crash. Then the central bank lowers rates, prints more money to reliquify the economy and the cycle begins again.
Because the cycle is constantly changing, it is rare to find an investment house that can sustain a continually high level of performance. Those that can are cognizant of the business cycle and change their investment mix to accommocate it.
We’re flexibly invested at all times. I regularly reconfigure our mix of assets as the economic cycle changes.
The Daily Bell: Being unregulated has tremendous advantages.
Thomas D. Conrad: This kind of flexibility has made the hedge-fund community increasingly popular. Hedge funds do not operate under regulatory constraints.
Managers need not be wedded to one specific strategy – or at least one specific investment … though many hedge funds by now have specialized in certain instruments.
I take advantage of the full spectrum of investment activities that 21st century technology has made available. In the 20th century, investment categories were rigidly identified and regulated. There were stocks, bonds, futures, real estate, etc. But a platform for mixing and matching these instruments did not exist.
By allocating carefully across asset classes while taking into account the changing business cycle, I can create a strategy that is intended to mitigate risk and maximize reward.
The Daily Bell: Unlike some mutual funds …
Thomas D. Conrad: Mutual funds, bound by significant regulations and public prospectuses, have little of this sort of flexibility. This is one reason, over time, that hedge funds may have often outperformed mutual funds. And the era of hedge funds seems only to be beginning.
Previously, there were severe limitations on how non-public investments could generate publicity. Positive political and regulatory changes are affecting hedge funds and non-public opportunities generally. The JOBS Act will shortly allow non “public” investments to be advertised worldwide. The new regulations will only make hedge funds more popular.
The Daily Bell: Let’s discuss your background a little more. You were involved in a historical time when it comes to the securities industry.
Thomas D. Conrad: Well, to start at the beginning, I attended Ohio Military Institute and then went on to Penn State University. When the Korean War broke out, I joined the National Guard and served time in Germany. Eventually, I became a first lieutenant, managed baseball for an Army team, was stationed for a while in Germany and finally returned to Pittsburgh where I met my current – only – wife, Joan.
We lived in Washington DC, where I began to build a financial-sales career. I started by working for Federated Investors, a mutual fund company in 1956. Later on I started my own life insurance firm focusing on the military. It is still in existence today.
The Daily Bell: You worked with some famous folks.
Thomas D. Conrad: I sold mutual funds for Jack Dreyfus’s mutual fund, which was just beginning at the time. Eventually, I joined forced with OppenheimerFunds, also just beginning, and later those funds were marketed through my own personal sales force. I was also co-founder for The Institute for Certified Financial Planners, which is today known as the College for Financial Planning and is the biggest college around for brokers and advisers. And I was the first chartered financial analyst in the United States.
The Daily Bell: But your views about the industry have changed.
Thomas D. Conrad: I am certainly not a believer in the formal organization of the modern security industry. For instance, I speak regularly to a top man at the CATO Institute, Robert Levy. They’ve done a lot of good work on insider trading laws. There’s really no justification for insider trading, in fact.
As someone running a fund, I want to use every scrap of information I can acquire to help my clients be successful. But the regulators purposefully keep the definition of insider trading vague. No one can really define those statutes.
The Daily Bell: What information are you looking for?
Thomas D. Conrad: Information valuable enough to be reflected in the price of a stock after you find out about it.
The Daily Bell: But a lot of the stock market’s valuation has nothing to do with fundamental information these days.
Thomas D. Conrad: Absolutely. Markets today have no relationship to fundamental investing. It’s all phony. Several times this calendar year, I’ve taken significant short positions, given that the market is overpriced, but I keep getting beat up. This becomes a very difficult situation. You try to follow the trend but at the same time you’re aware that markets are due for a correction.
The Daily Bell: That’s why it’s valuable to follow a hedged strategy.
Thomas D. Conrad: We do try to stay hedged, though there are always opportunity costs.
The Daily Bell: How far out do you look?
Thomas D. Conrad: Short term to medium term. We can’t take the very long term because we’re an investment and trading operation. But it’s obvious that markets are inflated. The world is being run by these socialist wealth drummers who want to create excess debt and depend on substantial monetary inflation to do it. The whole idea is to create disaster and then justify further monetization to erase the debt.
The Daily Bell: Did you realize that right away?
Thomas D. Conrad: No, over time.
The Daily Bell: You received a Ph.D. from American University in Washington.
Thomas D. Conrad: First a Master’s Degree and then a Ph.D. For my Ph.D. they demanded five majors. In my case it was security analysis, managerial economics, business law and accounting and then statistics.
The Daily Bell: Okay, five majors and then a similar number of companies.
Thomas D. Conrad: By 1965, I was indeed operating five separate companies: Conrad and Company with a seat on the Philadelphia bourse, Conrad Securities Corporation selling mutual funds, Conrad Agency for life insurance sales, Conrad Financial Planning for estate planning and, finally, Financial Management for income taxes and trusts.
The Daily Bell: That lasted until the early 1970s.
Thomas D. Conrad: Yes, I made almost a clean sweep in 1971, selling most of the companies and buying a farm where the children could grow up. We raised five children on a farm outside of Washington. We grew corn, alfalfa and cattle on 65 acres. That came to an end in 1980, when the White House called and asked me to serve in the Reagan administration as Deputy Assistant Secretary for the Air Force.
The Daily Bell: What did you do there?
Thomas D. Conrad: I basically put myself out of business. I became a de facto reorganizer of the military because of my financial background. I balanced the books and after four years, the outgoing and ingoing were roughly in balance. I left.
The Daily Bell: But you didn’t start your hedge fund right away?
Thomas D. Conrad: No. I took another detour, first in a private business venture and then on some of the best golf courses in the world. But I was never much good as a golfer and by 1994 I’d decided to return to my roots by founding the World Opportunity Fund as a boutique business for a close circle of investors.
The Daily Bell: When did it become a fund of hedge funds?
Thomas D. Conrad: Two years later. A “fund of funds” (FOF) holds other investment funds instead of individual securities instruments and can also be referred to as a multi-manager investment. My fund is known as “unfettered” because I draw on the expertise of managers from a proprietary group of 350 advisers.
The Daily Bell: Diversification is key?
Thomas D. Conrad: Diversification is supposed to result in a reduction of volatility without a corresponding reduction in performance. Fund of funds may utilize business-cycle perspectives. My fund managers are selected both strategically and statistically. By maintaining a database that tracks hundreds of such fund managers, I am able to allocate fund capital among “best performers,” and even switch capital within the captive family of managers that is currently active.
The 21st century, far more than the 20th, has provided fund managers with truly globalized investment tools. A rich tapestry of new trading techniques is available to fund managers. I can truly operate globally and in a hedged fashion, taking advantage of every asset-class available as I see fit.
In fact, the World Opportunity Fund utilizes the most modern data points of investing to attempt to control risk and generate regular returns.
Objectives – Seek above average returns with below average risk.
Differentiated structure – Liquidity, value, & transparency.
Fund Discipline – Proprietary quantitative strategy, complimented with deep qualitative analysis creating a uniquely, risked managed investment.
The Daily Bell: Tell us more about the diversification.
Thomas D. Conrad: We go far beyond diversified investments. The fund holds precious and rare metals but in a market this over-bought, volatility will definitely play a factor. Stock markets at this stage, late in 2013, can go up fast and down hard.
The Daily Bell: Any thoughts about the globalization of currency?
Thomas D. Conrad: The petrodollar was viable only because Saudi Arabia was the dominant oil producer and could insist that other countries pay for oil only in US dollars. Lately, the BRIC countries – Brazil, Russia, India and especially China – have made strenuous efforts to bypass the dollar, signing various currency agreements that allow them to swap currencies directly with other countries without utilizing the dollar.
This is in line with a vision that the IMF has for a basket of currency that would back its own global money called Special Drawing Rights. SDRs are a special kind of reserve currency that the IMF offers to countries that want to supplement their reserves.
The Daily Bell: Other insights on the current business cycle?
Thomas D. Conrad: As the current business cycle develops, rates should rise and non-US markets should become more attractive. But as has already been pointed out, these are anything but normal times. A case can be made that there are institutional pressures now aimed at eroding the dollar in order to replace it.
The Daily Bell: How promising are developing markets?
Thomas D. Conrad: Ordinarily, the action should be shifting to developed and emerging stock markets. Interest rates should start heading higher in the US once the Fed “tapers” and reduces its easy-money policies. Higher rates would tend to cause a bond market contraction.
But countering these trends seems to be the determination to continue to support US equity exchanges. US central bankers present us with an astonishing determination to continue to provoke monetary inflation – a faux-basis that has driven domestic securities far beyond their “natural” rate of return. This determination needs to be factored in when considering at least near term trends.
This in no way diminishes the longer-term downside risks, which increase substantively the longer the current program of stimulus continues to be applied unabated. Over the long term, US equity markets will not outperform commodities and other asset-based investments. Global equity markets will continue to show promise. This is in keeping with how business cycles eventually perform – and turn. As rates go up – and inevitably they must – tangible assets surge to the fore and securities market stumble.
The Daily Bell: Tell us more about the nuts and bolts of the selection process.
Thomas D. Conrad: The World Opportunity Master Fund’s database probes 27 criteria on every prospective, current probationary, and past fund manager. The majority of managers employ “relative value” arbitrage strategies and long and short positions, reducing overall market sensitivity. The make up of the Fund’s portfolio of managers is the result of 20 years of data mining, tracking, and investing. The uncompromising core tenet is a fiduciary commitment to the preservation of wealth.
I use 15 managers, which is optimal according to modern portfolio theory. And my managers are dispersed around the world, placing funds in a variety of markets and securities. The majority of managers employs “relative value” and arbitrage strategies, reducing overall market sensitivity. The make up of the Fund’s portfolio of managers is the result of 19 years of data mining, tracking, and investing.
If a manager’s relative performance is poor or if significant changes occur in a manager’s approach or his investments, the capital allocation to the manager may be reduced or withdrawn. All collected quantitative and qualitative data is continuously input and updated into the funds proprietary model.
The Daily Bell: Any other points you want to make or publications you want to refer to?
Thomas D. Conrad: We recently began to purchase farmland outside the United States and have expanded ways that investors can place dollars abroad. I think over the next decade, the US stock market will considerably underperform, though not perhaps global markets. Interested readers can visit my website at www.worldfund.net.
The Daily Bell: Thanks for the interview.
Thomas D. Conrad: Thank you.
BONUS INSIGHT: ABCS OF DR. CONRAD’S CURRENT PERSPECTIVES
Allocation Strategy: Managed futures are part of modern portfolio theory. Allocate across all asset classes including land.
Assets to Avoid: Real estate because of its illiquidity. Stay away from REITS.
Commodities to Own: Platinum, palladium, gold and silver. Gold will outperform the S&P over the next decade.
Diversification: Investable markets include South Africa, China, Indonesia, Australia, Japan, BRICs.
Equity Strategy: Hedge the market and buy precious metals and emerging markets. This is our strategy.
Farmland: Purchase for its superior value accrual and income production. Region: Uruguay. Crop: Soybeans.
Inflation: Up to 14 percent a year in the near future.
International: Neither the European Union nor the EU is going to collapse. They will continue despite signs otherwise. China will become an increasing political and economic force.
International Growth: The growth of the future is in developing countries with an increasing consumerist population. China and Africa are examples of such regions.
Investment Vehicle: Utilize broadly diversified hedge funds if possible, ones that utilize Modern Portfolio Theory to control risk.
Petrodollar: The dollar will cease to be a force in the world as price inflation takes it toll.
Selected Positions by Country: In Greece, the British Virgin Islands and Uruguay.
Promising Nation: South Africa for its stable government and broad resource base.
Tangible Positions: Gold, silver, rare metals and commodities.
Note on Fees: Dr. Conrad’s hedge fund takes 10 percent of profits once an eight-percent hurdle of profitability has been reached. The fund’s policy is that neither Dr. Conrad nor his sons can invest money anywhere else except in the fund.
The Daily Bell After Thoughts
Today, we have a completely different platform from which to evaluate 20th century success stories like Dr. Conrad’s – and, yes, even a different frame of reference.
But Dr. Conrad certainly participated successfully in his era, and his hedge fund uses the latest diversified strategies and instruments around the world to achieve further success today.
He’s even purchasing farmland and is expanding his commodity positions generally because he believes US equity markets are going to underperform considerably in the next decade.
In today’s hyper-regulated environment, the kinds of non-regulated, private, diversified strategies that Dr. Conrad employs stand as a stark testimony to the utility of being able to diversify broadly over assets and instruments.
US investment industry watchdogs have carefully crafted an environment that makes it impossible to use such approaches in most public funds. As a result, investors shall have poor results when the next financial crisis hits. And it will.
Rockier times are surely coming, though not before a “Wall Street Party” that may elevate equity positions considerably. Ironically, Dr. Conrad states in the interview that he knows he ought to short the market but keeps getting beat up when he does.
This is the illogical and dangerous marketplace that the top elites continue to stuff like a Thanksgiving turkey with an endless supply of endlessly debasing printed, paper money.
Dr. Conrad does us a service by reminding us that hedging is an important strategy for those with equity exposure today.
This interview included some material appearing in other places and other forms.
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