Archives for April 26, 2017

Tough Job: 5% of Active Investment Managers Will Add Value

alpha200People always argue about how “efficient” the market truly is. Only academic, ivory-tower geeks believe in efficient markets right? My longstanding opinion is that no, markets are not 100% efficient, but it’s a tough, cutthroat world out there. Especially over the long run. Here’s yet another reminder to put in the anecdote folder.

This WJS article (paywall) talks about Jack Meyer, a superstar manager of the Harvard endowment that went on to run a high-profile hedge fund called Convexity Capital. Unfortunately, his hedge fund has lost over a billion dollars (!) of client money recently, in fact losing money every one of the last 5 straight years.

This recent bout of poor performance has altered Mr. Meyer’s worldview… of other managers (emphasis mine):

Mr. Meyer has often told smaller endowments and foundations that ask for advice to index 75% of their assets and use board connections to access world-class active managers for a sliver of their portfolios. He says he used to think 80% of active managers didn’t add value but now thinks it is closer to 95%.

Convexity is in that remaining 5%, he said.

Matt Levine of Bloomberg has a funny yet wise take on this:

I assert that 100 percent of active managers believe that only 5 percent of active managers add value, and that 100 percent of active managers believe that they are in that 5 percent, or at least say so in interviews. Otherwise why come to work every day? But that means that 95 percent of them are wrong. If you’re looking for the ones who are wrong, I guess one place to start would be among the ones who lose money five years in a row.

That 5% number reminded me of this quote from Charlie Munger of Berkshire Hathaway (source):

I think it is roughly right that the market is efficient, which makes it very hard to beat merely by being an intelligent investor. But I don’t think it’s totally efficient at all. And the difference between being totally efficient and somewhat efficient leaves an enormous opportunity for people like us to get these unusual records. It’s efficient enough, so it’s hard to have a great investment record. But it’s by no means impossible. Nor is it something that only a very few people can do. The top three or four percent of the investment management world will do fine.

As Josh Brown puts it, edges are ephemeral. Okay, so somewhere around 4 out of 100 people *whose job it is to add value*… will actually add value. Sounds like a tough job, but something to consider when they come asking for your money.