When you manage someone's money, it's often a nice gesture to tell them roughly what you're doing with it. This is a norm regulators are happy to support, so depending on what kind of entity you run, you might be disclosing long positions on a 45-day lag, short positions over 0.5% of a company's shares outstanding by the next day, long positions structured through swaps, etc. And you'll also probably tell your investors what you're up to.

These disclosures vary a lot in terms of how thorough they are. For some funds, you might get a terse monthly email disclosing your total return and nothing else. Other funds do quarterly letters where they list all of their major positions (or all of the ones they want to talk about) and share the logic behind them. Some macro funds will periodically share a few dozen pages of thoughts about a trade or theme.

So, what determines whether your email inbox has a note saying "You're up 0.7% this month and 9.2% year-to-date, please email us if you'd like to withdraw" or an email with a novella-length explanation of why cocoa is due for another massive rally?

Part of it is the nature of the alpha. The most secretive funds tend to be the systematic ones, because some of their strategies are just very well thought-out implementations of fairly prosaic ideas. If you have some set of heuristics for figuring out which intraday moves will persist and which ones won't, it might boil down to a simple set of rules that were incredibly annoying to figure out. Or you'll have an incredibly long and complex set of rules that nobody has strong intuitions about, because you're capturing lots of obscure long-tail signals that collectively produce a high return. The closer your situation is to this, the closer you are to a case where the details of the investment process are interesting only to someone who's planning to use them.

Short-term funds that care about fundamentals have other reasons to keep their disclosure vague. They're running a quanty meta-model on top of the discretionary stock picking, and one of the drivers of that model is that some of their sources of returns are very lumpy, with good years for commodities followed by good years for volatility traders followed by good ones for treasury basis trades. If they have a different mix of strategies from their competitors, they really don't want to tip their hands that all the alpha these days is in Kazakhstani currency options or something. And if they're making disproportionate money from a strategy their competitors are running, that gives away something about their positioning—in an adversarial environment where high leverage encourages rapid selling, it's a very bad idea to let anyone know in advance what trades you're likely to blow out of. And, in a more boring way, data about the current portfolio isn't that useful, if, by the time the letter has been proofread, vetted by compliance, and finally distributed, the big position they mention is suddenly something they've exited.

It's a mark of the industry's maturity that they do disclose more than they used to, especially on the breakdown in what general strategies they're allocating to and how much they're earning from them. That's still information that will filter over to their competitors and give them a rough sense of where the opportunities are, but these disclosures are often at the level of "commodities" and "rates" rather than specifying which specific ones. It tends to feel like reference material.

Whereas the macro stuff is closer to a riveting story. Not only that, but it's a story that connects directly to laypeople—most of us are familiar with the end products of commodities, and presumably concepts like treasury bonds or the nation of Japan have pretty high unaided recall, so it's a story with a familiar cast of characters. So this is part of what macro managers are able to sell to their limited partners: hopefully-uncorrelated returns, plus a sophisticated opinion about current events to bring up at social gatherings.

This actually serves a purpose beyond being a way to expense some very pricey finance newsletters. Some macro trades work when perception changes and drags fundamentals with it. If there's an expectation that some commodity is likely to face a shortage, people are more likely to hoard inventory which makes a shortage more likely. If some country is on the edge of a financial crisis, a little incremental currency depreciation caused by pointing this risk out can be enough to set it off. Policymakers are known to care about interest rates and currency valuation from time to time, too, so pushing the narrative around even a little can mean getting policy changes that make it work.

Private equity has a unique disclosure problem, in that they're the main source for valuations of their holdings. PE firms do tend to mark these roughly accurately, just a little slowly. If a stock might have gone from $10 to $2 to $15, as highly-levered companies are sometimes known to do, a PE firm that owned the company outright might mark it more like $10, $8, $13, shaving off some volatility on both sides in order to get a smoother progression. Maybe they have a point, especially if the valuation change is from valuation multiples contracting rather than just earnings doing so. But even if it's unintuitive that multiples bounce around a lot, it's also historically true that trading purely based on multiple adds 3-5 points per year to returns, but that hasn't really been true in the US since the late 2000s. So there's a sense in which volatility laundering used to be a kind of held-to-maturity accounting, but that's no longer the case. It does give them something to write about to their investors, though. They don't have to worry about someone chasing them in a trade if they already bought the asset in question.

The hardest-to-explain disclosure norm is the one that prevails among long-term equity investors, where they tend to explain their holdings even though this can lead to coattail-riding or even bets against them. There's just no way to avoid the risk that someone will invest whatever your fund minimum is and then replicate the trades fee-free, at which point the value investor's main value-add is convenience, market-timing (which quarter to enter and exit the trade) and position sizing/concentration. ¹ But these investors still produce returns and collect fees, and they do sometimes dig up very interesting ideas that then get crowded. One possibility, and probably the one they'd point to, is that their limited partners are sometimes going to give them feedback on their ideas, or how they're pitched. If you're buying a stock because you think it's undervalued, you need to know whether your case is actually persuasive.

(Of course, another possibility here is that Buffett's an investing role model for many such investors, and they might decide that it's best not to tinker with a model that works.)

The ideal for investor communications is that it does exactly one thing well: keeping the time-weighted versus dollar-weighted returns from diverging too sharply. There are some funds that have good returns since inception but have net destroyed investor capital because they peaked in size before a period of negative returns. And there have been other funds that had a down period, and then completely snapped back and recovered their losses. For those funds, the investors who felt confident in the long-term story the fund told about its holdings were probably more likely to stick around. Having investors who understand a strategy well enough to stick with it is something close to a put option for the fund manager as a business, by shrinking the magnitude of a downside scenario. And if you can get a very cheap put on the value of your largest asset, that's a deal worth taking.

The Diff often looks at the interaction between the actual trade selection part of what asset managers do, in contrast to other elements of the business. For example:

• We’ve considered investors as translators between different market participants ($)

• We’ve looked at the prop trading business.

• And at the concept of multi-manager funds in general ($) the model’s recent evolution as a validation of the entire concept of a hedge fund ($).

• Crowding and untimely withdrawals can be a catastrophe ($).

• Buy-and-hold investing still requires lots of individual decisions to hold ($).

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1  Another value add is more emotional in nature: most people don’t have the stomach to put 20% of their portfolio in one name and white knuckle (or even add, in size) through a double digit drawdown i.e. continuously and correctly reject seemingly logical reasons to sell. If you invest in one of these funds and are subject to a lockup period, you are forced to hold on, and this is what separates market returns from above market returns even if both managers are equally good at picking stocks.