5 ways active management can remove the gun from its head

Jason Voss at the CFA Institute has a really interesting take on how the active management fund complex has essentially loaded the gun and placed it to their own temple over the last few decades. The upshot is that benchmarks used to be a way for managers to be evaluated after a period of performance, whereas now they serve as a target which managers are meant to shoot for before the fact. There are all kinds of expediency and career risk issues wrapped up in this concept – none of which speak to the benefits of the end user, the investor.

Voss looks at the evolution of benchmarking, style boxing, and tracking error-ing and illustrates how asset managers have painted themselves into a corner on each of these issues in the name of appeasing the third party consultants who direct all the AUM.

He offers five suggestions to those managers who’d like to break free from this prison of their own making:


  1. Earn AUM through performance, not marketing. A majority of your time should be spent on research, not giving presentations to third parties.

  2. Run your firm leanly. If AUM walks out the door because you begin managing money for end clients and not for the expectations of a third party, then you still have scale enough to endure. Remember: good performance news eventually reaches client ears . . . especially in the era of social media.

  3. Remember that benchmark is a noun, not a verb — namely, “A standard or point of reference against which things may be compared or assessed,” according to Oxford Dictionaries. Where in this definition does it say that you should navigate to the benchmark? Your job is to navigate away from, and better than, the benchmark.

  4. Talk to your clients and develop a relationship with them so they know who you are and what your investment philosophy is. Then they may develop expectations in alignment with yours.

  5. Be aware of the potentially Faustian bargain entered into when you agree to be measured by third parties in exchange for possible AUM favor.


I recommend reading the whole thing if you’re a professional investment manager.

(meanwhile, between the gun thing, the painted into a corner thing and the prison break thing, I mixed three different metaphors here. My writing is going downhill fast. F*ck, there’s another metaphor.)


Alpha Wounds: Benchmark Tail Wags the Portfolio Management Dog (CFA Institute)

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