Details on the returns so far. And the high iq of high fashion. Our expert guest will rate the strategy of gucci, burberry, and other known labels. What it all means for luxurys bottom line. First up, my conversation with an allocator. The head of an office with 500 billion in asset management. Constellation Wealth Management told me that their clients are focused on yields and taxes. People generally feel pretty good. It has been a good investment year. The s p 500 is up 25 . People are feeling pretty good. Cautiously optimistic. I do not think they are overjoyed. As we look at numbers on asset allocation, we see people taking money from fixed income. Much of it is not going back into the equity market. You have a net worth in the Third Quarter that rose. In theory, i know you deal with High Net Worth. People should be feeling good. You told me that there is not a the same level of confidence that you have seen in years past. If you think about Household Net Worth going to the highest recorded, you see that people are feeling flush. Our view is that it will be a good christmas season. Investors remain cautious. What do they want . Yield, obviously, but what are they saying you need to help with . This year, especially with taxes, the rates are up. We have a four percent surcharge. They want to harvest tax losses for it we do not have a lot of those. Theyre focused on tax planning and lets do going forward. Our view has been that we still like the market. We might represent some of our exposure and hedge funds. Before we get back to hedge funds, what do you make of this rule . Will it change the tone in any way . Our clients are not talking about it. This is a wall street phenomenon. I think that probably, if history is our guide, they will over regulate and make adjustments over time. The concept of the rule is good for markets. You feel like you promote stability . Things cannot go out on the ledge and take unnecessary risks. I think that makes it more stable. We have to make sure that the banks and big institutions do not trade against clients. It is one thing to provide liquidity and it is another to trade against clients. Perhaps we had gotten too big. The banks were known to have done that. You mentioned hedge funds. Where specifically do you see opportunities in the new year . I think that certain hedge funds provide great risk and return opportunities. We like japan. It has been one of our best positions. It has turned out exceptionally well. It is the third or fourth inning in japan after 20 years of difficult markets. We think we are in an interesting time. They have gone up Something Like 50 this year. It is a closed in and an etf. What that one does is, it is short the yen. It is a double bid. If you think the yen is going lower constellation wealth advisors. Funds are just one of the choices that allocators have. My next guest manages 2. 2 billion. We are told that investors now have access to private equity in the same way that they had access to hedge fund strategies. We have just come out with a new fund. It is meant to be an alternative to private equity investing in a liquidating value format. It means that people who are nonaccredited, who do not have to meet that benchmark, can participate. That is correct. Why are you doing this . I assume you do this so you can make money from it. You look at the client base, and most of the advisers have a number of reasons. You have capital and dry powder and its very hard to understand. Second, it is not liquid. Someone who has 15,000,000 may not want to lock up their income. We try to achieve full be close to returns in a mutual fund format. What is the secret sauce . We have partnered with the number of firms to gather data. That allows us to construct a portfolio to deliver returns. There is qes and the largest provider of equity data in the world. The three firms have created an index that works out of europe. We get the information that they deliver to us and updated weekly. We mimic the index. They developed this 15 months ago and we launched our fund in the last month. It is too early to ask, but so far so good . Were just trying to deliver two percent or three percent above equity returns. It is a globally based two percent to three percent above equity is actually pretty hard to pull off. It would be this year. We look at how private equity firms will allocate capital on a sector basis. Also, the amount of dry powder that they are using. There are times that the market is difficult. They may not invest as much and therefore we put in more cash. Therefore, during difficult market environment, we have found that it will better protect capital. So, how are you seeing of this retailization . Whatever category, how do you see it from their point of view . It started from germany and it grew. When anything is innovative and new, the proof is in the pudding. We have competitors in there who have done well. It is starting to grow. The industry, as well as ourselves, have achieved the best years in terms of producing the types of returns that investors expect. There is this idea of transparency. It was only available to a select group of very rich people. Correct. When you have a daily value, the transparency is tremendous. We can provide the transparency that they want to give to their client. How did you pick the managers . There are very few people who could do Something Like this. The database is tremendous. It is all encompassing and the best in the world. To work to a firm like qes, together with nemura, those are strong partners. Bob worthington of hatteras fund. When we come back, hedge funds are attracting new capital this year. We will say which strategies are getting the most. And the concept of luxury and pawn shops may not strike as the match. But that is exactly where borrow lives. They are selling fine wine, jewelry, and art. When we come back. We also want to hear from you. Send us your comments and questions. Any you have for us or our guests. You see the address there. Easiest to do it via twitter. Welcome back. We focus now on hedge fund. As a group, hedge funds are on the track for the worst performance since 2005. The cio of ritholtz Wealth Management is a Bloomberg View columnist. We chatted about the industry. The concept at the Kennedy School they look at the various issues that face public pension funds. A big part of the problem is that they have not been getting the returns in equities. The temptation is, lets look at the alternatives and the yale model. That includes a lot of hedge funds. The problem that that has generated is that the asset class known as hedge funds has not been getting the job done. When you say known as, what does that mean . It is a legal structure that describes partners. It is not stocks, bonds, commodities. It is a leveraged trading vehicle. What people seem to expect has not been happening. You will get meaner versions, you will not necessarily see that return to prior greatness due to the mathematics. The industry does continue to attract new capital. Are investors so desperate for yield . This is how it continues to some is expected returns. You can reasonably expect three percent in bonds. It looks like the way the accounting is done, by various pension funds, they could say that our expectations are for 8 or 10 . They do not have to put that much cash up each year. The states do not have to pony up. The situation gets worse. Not only are they not keeping up with the markets they are underperforming. Theyre making the whole that much bigger. You mentioned the structure. If the performance is so lackluster, maybe that needs to be revisited. I know that there are actually some Institutional Investors who have managed to get the fees move down. The old jokes that grouches can tell i cannot be a part of any club that will have me. They are not cutting fees eat has the flagship funds are doing fairly well. That is the paradox here. The distribution of alpha among hedge funds we think of a bell curve. It is symmetrical and smooth. With hedge funds, it is nothing like that. There are a handful of outliers. Some of them are new emerging managers. The old pros if you do not have a few billion dollars, youre not getting in. Good luck selecting which manager will out perform you. You have to be very courageous. There are a lot of funds out there that are midsize. They do not want any outside capital. They are the size they want to be. That is true for a handful of them. What we have found and a lot of studies show a manager will discover a new portion of the market that they can generate alpha from. That is not a giant vein that they can mine forever. It tends to be a smaller piece of arbitrage that they identify. It is good when they are 100 million. Once they scale up above a 1 billion, they lose the advantage. Many of them become class indexers and the problem is, if someone outperforms, who cares . Sac capital was famously charging higher. There are questions about those returns. If you could get into a fund that has been and continues to outperform in excess of their fees, the s p 500 is up. If you are in a fund that is grossing higher, you are underperforming the market. To get above that and do it consistently, is a challenge. In 1997, the industry was a little over 100 billion. Today, it is 2. 5 trillion. There is not that much alpha to go around. There are not 10,000 advantages. Bloomberg view columnist. When we come back, the pawn shop for the one percent. The ceo of borro on how the rich alone get luxury. Pawnbroker and luxury may not be two terms that you would normally put together. Even top earners are looking for alternative ways to get extra cash. Londonbased borro makes loans against everything from luxury watches and fine wine to vintage cars. The founder of borro told me how he got the idea for the company. I first came up with the idea in mid2008. There was a contextual point. The people who have luxury assets very nice watches and jewelry, things like that. They were not leveraging them. If you have millions of dollars, you have a private bank. There are pawn shops that serve people. So how does this actually work . When you say loan against, am i letting somebody borrow something . They are renting it . People come to us and bring their assets to us. We take possession and we give them cash and return. Ok. It is a loan. It is typically about 10,000. It is the lower end of a High Net Worth spectrum. Are most people using it in london or are they here . Is it global . We started in london. We have opened in new york in january 2012. We have done 45 million of lending this year. The split is 60 london, 40 u. S. As far as the types of items, we went through the list. There is fine wine, jewelry, cars. What do you see the most of . It is nice jewelry and watches. We get a lot of fine art. Bigger pieces are worth more. We do quite a lot of quirky assets. Like olympic gold medals and grammy awards. There are some quirky things. It is quite an interesting angle. What about 2008 and 2009 as you allude to. All of these guys in the city were not going to get the bonus. But now, who is using this . There has been a shift. We get a lot of Small Business owners. A lot of retailers. A lot of property developers. A lot of people who work in construction they struggle to get access to credit. I was just going to say, i am sure they can get a better deal. The thing for us is the speed with which they can get access to money. We can do it the same day, next day. We can serve people all over the country. They can come to us or use courier partners. Borro founder. We stay with the luxury and the digital role of marketing. Scott galloway is at the Nyu Stern School of is business. Burberrys third year in a row as number one. There are others that do not have the capital for more infrastructure. They put a lot of money into digital. There are the few that you named. They seem to be kind of connecting the best of all worlds. There is a notion of attribution. People tend to look at e commerce sales as an indicator of whether digital is paying off. You miss the majority of the story. While some of the luxury purchases are made online, for in five are influenced by digital. They are influencing decisions. 750 billion worth are influenced by smaller screens. Your digital presence affect a lot more than ecommerce. How do you measure that . There are 850 data points. What we have found is that these firms have strong iqs. There is a strong correlation between Revenue Growth and shareholder return. It makes sense because when youre big into digital, it is like working out. You find that every part of your life gets better. That is so inspirational. If you become more data driven, you think about a younger consumer. Those kind of skills lend themselves well to all kinds of things in addition to e commerce. What were seeing is that firms that are committing to strong digital have this rising tide effect. It is linked to greater returns. Digital is moving to the center. Were thinking about how to make it part of the culture. Burberry number one, gucci is number two . A lot of the great things that gucci is doing carry across the enterprise. There is enterprise value. We are finding similar scores across the enterprise. That is what a multienterprise brand wants. They better show it. The margins are crazy. They want to show that theres a reason that you have more than one brand. There are a lot of guys out there. When you talk about these subjective qualities about the digital experience, how important is design or storytelling . Super important. I would say that a lot of brands err on the side of the creative. There is a journey to nowhere. The bottom line is, wealth is another channel of distribution. It is about saving time. Give me the product and the right information. The web is about saving time. Social media is about wasting time. I say that in the best way. It is true. You want to learn about that. Follow the design on instagram. Put me on a funnel toward purchase. Either on the site or in the store. I like that a lot. Social media is about wasting time. It is about being educated, i guess. This is a new channel. The best brands are getting 10 or 15 of their sale. The greater percentage of sales you get, the higher that multiple. That is what is getting the attention. Bankrupt company, bankrupt city how do you be a luxury brand . For 30 years, we lost our way. Sales had declined. How do you get away with not listening to customers . How do i know you are listening now . The biggest thing is still pushing through that perception that it is the old man car. We produce the worlds best cars again. We can do this. It is cadillac