The Paper Trail: HALO Effect

Greetings! I’m just back from a spring break trip to San Diego to visit my sister and her family. It's a pretty special feeling to watch your kids bond with your sibling's kids. Memories made in real time. 

It's always nice to slow down for a week; not everything in life needs to move at the speed of markets. Speaking of which...

Markets did what they tend to do when you step away for a few days — they went down. The final week of March put an exclamation point on what ended up being a pretty dismal month for investors.

The escalating war in Iran led to sharp moves across equity, fixed income, and commodity markets. U.S. stocks are near correction territory. International stocks, which had been on a tear, are now flat for the year. Software stocks, which caught a bid in early-March, have since given it all back and then some*. All the while bonds offered little in the way of diversification, with the Agg down nearly two percent for the month. 

*As I write this on the final day of the month, markets are rallying hard on hopes of de-escalation in Iran. A reminder that narratives can turn just as fast as prices.

Per usual, the headlines have been eager to connect dots, even when the underlying picture is more nuanced. In environments like this, markets have a way of searching for a new framework to explain what’s happening.

One theme in particular has garnered a lot of attention, and like any good theme is has an acronym: HALO. Originally coined by my pal Josh Brown, it stands for heavy assets, low obsolescence. It didn’t take long before it was picked up, repackaged, and redistributed by the broader sell-side research complex. Still, the core idea has resonated. After a long stretch dominated by capital-light, high-growth businesses, markets may be starting to rethink what actually makes a business defensible over time.

This month's edition of The Paper Trail touches on this theme and many other topics:

• Emerging market strength
• Hedge fund portfolio utility 
• The price of having fun with growth stocks
• Private real estate consolidation 
• Investing in U.S. affordable housing
• LP financing solutions 
• Changes in stock market industry composition
• The HALO (heavy assets, low obsolescence) framework
• Incentive fees in evergreen funds
• Zombie funds in PE
• A century of wealth creation in the U.S. stock market
• Integrating value, quality, and momentum signals
• The importance of pre-tax alpha in tax-aware long-short strategies
• Layering diversification on top of equities
• Opportunistic credit and the efficient frontier

Are emerging markets becoming more stable as domestic capital replaces foreign flows?

"This internalization of capital means EM markets are becoming more stable, less dependent on foreign flows, and less prone to past boom-bust cycles, which could be contributing to the volatility convergence."

Emerging Markets’ Strength Comes from Within (Robeco)

Should hedge funds be evaluated by role rather than strategy?

"While grouping together hedge funds by sector does provide some consistency in risk characteristics, there are often wide disparities in profiles within these groupings. For instance, an opportunistic equity manager with a long bias of roughly 100% should be expected to perform very differently than a manager who consistently runs a very low bias, such as just 20% long."

 
Hedge Fund Portfolio Utility (Aksia)

Are growth investors sacrificing expected returns for excitement?

"Growth investing has a return distribution much more akin to gambling than value investing, and most would agree that being a growth investor is a lot more “fun” than being a value investor. Everybody loves the idea of investing in the next Amazon or Nvidia. But we would argue that a strong reason to consider value investing is that, while it is potentially less exciting, your expected return is higher."

The Price of Having Fun (GMO)

Is scale becoming a competitive advantage in private real estate?

"The fundraising environment shifted sharply beginning in 2023. Rising interest rates, declining transaction volume, and denominator effects drove a contraction in overall capital formation. In this environment, capital migrated toward scale."

Is Private Real Estate Actually Consolidating? (Arctos)

Is affordable housing one of the most attractive supply-demand stories in real estate?

"Affordable housing demand is structurally durable, not cyclical. Decades of rent growth outpacing renter incomes have created a demand profile that has persisted across economic cycles."

Investing in US Affordable Housing (Meketa)

Are LPs overlooking a more flexible way to generate liquidity while staying invested?

"By offering meaningful upfront liquidity without forcing permanent exits or imposing restrictive leverage covenants, these solutions allow LPs to achieve liquidity needs while maintaining manager relationships, preserving more upside potential, and without crystallizing a discount via an outright sale."

LP Financing Solutions: A Creative Alternative for LPs Looking to Generate Liquidity (Dawson Partners)

How has the industry composition of the stock market changed over time?

"Of the US firms listed in 1900, some 80% of their value was in industries that are small or extinct today, including railroads, textiles, iron, coal and steel. Meanwhile, 70% of today’s companies in the US come from industries that were small or non-existent in 1900. Technology and healthcare were almost totally absent from stock markets in 1900."

Global Investment Returns Yearbook 2026 (UBS)

Is the HALO (Heavy Assets, Low Obsolescence) framework reshaping how investors value businesses?

"HALO companies combine two defining characteristics: (1) Heavy Assets: Business models grounded in substantial physical capital with high barriers to replication — cost, regulation, time‑to‑build, engineering complexity or network integration. (2) Low Obsolescence: Assets whose economic relevance persists across technological cycles."

The HALO Effect: Heavy Assets, Low Obsolescence in the AI Era (Goldman Sachs)

How should investors evaluate incentive fee alignment in evergreen funds?

"An incentive fee should be conditional, meaning it should be earned by fund managers only if their actions directly lead to a positive outcome. However, because of their structures, semi-liquid funds’ incentive fees are effectively unconditional and virtually always collected regardless of whether the manager acts prudently or not. On top of that, asset managers play coy about how predictable the fees are, leading to inconsistent disclosures that make apples-to-apples fee comparisons more difficult than they need to be."

U.S. Evergreen Fund Landscape Q1 2026 (Pitchbook)

Are "zombie funds" in PE a symptom of misaligned incentives?

"We believe zombie risk is primarily driven by the instability of the manager, not necessarily underperformance of an individual fund. Such managers may lack both the incentives and the resources to manage underperforming funds. This can manifest itself in several ways, including lack of focus on monetizing the portfolio, weak governance at the portfolio company level, incomplete or delayed financial reporting, or a GP that is increasingly distracted by side projects or new initiatives. Truly the zombie nightmare."

Have You Seen The Dead Walking? A Zombie Fund Story (Upwelling Capital Group)

How much of long-term stock market wealth is driven by a small number of winners?

"Shareholders’ wealth was enhanced by $91 trillion over the century, but long-term investors in nearly 60% of stocks incurred wealth reductions. The degree to which wealth creation is concentrated in a few firms has increased sharply in recent years."

One Hundred Years in the U.S. Stock Markets (Hendrik Bessembinder)

Is relying on a single investment signal a mistake?

"Rather than relying on a single dimension of information, we integrate value, quality, and momentum—three signals that are individually powerful, economically intuitive, and (crucially) complementary. Used together, they have the potential to form a more comprehensive and reliable framework for security selection and portfolio construction than any one signal could achieve on its own."

Why Value, Quality, and Momentum Belong Together (Research Affiliates)

Does generating alpha actually enhance the tax benefits of long-short strategies??

"The positive effect of pre-tax alpha on tax benefits strengthens with leverage and investment horizon. Two mechanisms drive this result. First, pre-tax alpha accelerates the growth of net asset value (NAV), which leads to higher dollar tax benefits as the asset base over which these benefits are realized grows. Second, pre-tax alpha leads to creation of new positions, acting similarly to recurring capital contributions. Position creation also lowers the cost of transitioning a long-short strategy to a long-only portfolio."

The Tax Benefits of Pre-Tax Alpha (AQR)

Should diversification be layered on top of equities instead of replacing them?

"When diversification is funded by reducing equity exposure, it improves Sharpe ratios but mechanically sacrifices equity upside – especially in strong bull markets. By contrast, a portable alpha overlay framework shifts the constraint from capital to risk. The relevant question is no longer what to replace, but how much diversifying exposure can be layered on top of equities without increasing total portfolio volatility. The amount of notional deployed to the diversifying asset becomes a function of how much additional risk capacity it is able to free up through its correlation structure to equities."

If You Can't Beat It, Stack It (Quantica Capital)

Can opportunistic credit ("OC") improve portfolio outcomes without increasing risk?

"OC’s combination of attractive returns, lower volatility, and lower correlation enhances portfolio efficiency, while the normalization of interest rates and rising refinancing pressure have expanded the universe of companies requiring balance sheet repair. With dedicated OC capital comparatively limited, there is less competition for complex restructuring, capital solutions and special situations transactions—supporting continued alpha generation."

Optimizing the Efficient Frontier: Opportunistic Credit Amid a Capital Structure Reset (Davidson Kempner)