Metaphors are tricky little beasts. Used well, they can make prose vivid; used poorly, they can sometimes become intrusive clichés. In the case of Stephen Todd Walker’s Wave Theory for Alternative Investments: Riding the Wave with Hedge Funds, Commodities, and Venture Capital (McGraw-Hill, 2011) the reader often yearns to move inland and be done with waves, surfers, and forced quotations. (Among the most egregious offenders in the quotation department is [on p. 309] the following: “In Herman Melville’s Moby Dick, the author explained that ‘[t]he sea was as a crucible of molten gold, that bubblingly leaps with light and heat.’ One can plainly see waves with the commodity gold.” Poor Melville and his "explanation.")
Although the author pays lip service to Elliott wave theory, his waves are more generic. As he writes, “Wave theory is simply the belief that all securities move in waves (patterns, cycles, or trends).” (p. 3) Few people today would dispute this belief, so we can quickly dispense with any further talk about waves and move directly to the substance of the book—investing in venture capital, commodities, and hedge funds.
The most informative part of the book focuses on venture capital, with which the author was involved in the 1990s when he worked at Alex. Brown. He traces the history of venture capital, highlights some of the principal players, assesses the performance of venture capital, and discusses advantages and disadvantages for investors. One of the disadvantages is the phenomenon of capital calls. A client commits a certain amount of money, say $1 million. But “few funds take all the money up front today. As the venture fund identifies new opportunities, they will call on their investors to put more money into the fund…. Because these calls are random and over long periods (years), it can be burdensome to an investor. Should the investor (for whatever reason) decide not to invest, there are normally severe penalties.” (p. 172)
Traditionally, venture capital exit strategies were limited to IPOs and mergers and acquisitions. “Today, however, there is a third area developing that might make it more difficult for individual investors to participate in private equity or venture capital unless they have $100 million to invest. The third leg of the stool is Rule 144A securities.” (p. 154) These offerings are pre-IPO (PIPO) and trade on private exchanges, primary among them Portal Alliance and SecondMarket.
The second part of the book, commodities, is competent, but it has already been eclipsed by several books devoted specifically to commodities investing. The treatment of hedge funds is more interesting because, in addition to describing the hedge fund market and listing advantages and disadvantages of investing in hedge funds, it appeals to our Forbes-style curiosity. Who are the highest earners (as of October 2008), what are the best-performing funds (as of January 2009)?
Walker’s book is not a core investment library holding. But it is a reasonable place to start for anyone thinking about investing in alternative assets, especially venture capital.