A Victim of its Own Success

Steve Cohen made some comments about the state of the hedge fund industry at a rare public appearance last night:

“Frankly, I’m blown away by the lack of talent,” Cohen said at the Milken Institute Global Conference in Beverly Hills, California, on May 2. “It’s not easy to find great people. We whittle down the funnel to maybe 2 to 4 percent of the candidates we’re interested in. Talent is really thin.”

Cohen knows more than most of us about the industry he thrived in and dominated for so long. But I can’t help but feeling that it’s not a lack of talent, but a surplus of talent that’s causing the industry-wide failure. The people who go into the hedge fund business are almost always impressive when I meet them and many of them seem to be brilliant. The question is not about if they’re skilled, it’s whether their skill will translate into excess returns for the end investor.

Having thousands of brilliant people all chasing the same goals in a finite market, with almost $3 trillion at their disposal, is probably the real problem. And why wouldn’t they be doing this? The rewards for making it are tremendous, financially, emotionally, socially, etc.

Success attracts the ambitious and profits attract imitation. The industry is a victim of its own success.

There is a limitation to how far you get on talent, intelligence and ability in a game where all of the players are of above average talent, intelligence and ability. Michael Mauboussin calls this the Ted Williams effect. A player today of equal ability does not come anywhere near Ted’s dominance as a hitter, given how much more competitive the league is now than when he played. Or, if it does happen, it’s so rare that to bet on it happening often would be a foolish bet.

Betting on a manager to thoroughly dominate today’s investment markets, reliably and consistently, is equally foolish. Paying up for the privilege of finding out whether or not you wagered on the right player is just bad investing.

Talent isn’t a sure thing when it’s basically a prerequisite.

Source:

Hedge Funds Under Attack as Steve Cohen Says Talent Is Thin (Bloomberg)

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AIG Seeks to Redeem $4.1 Billion From Hedge Funds After Loss (Bloomberg)

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  1. STOCKS FALL: Here's what you need to know (DIA, SPX, SPY, QQQ, TLT, IWM, AAPL, TWTR) - Business magazine | Business magazine commented on May 03

    […] Josh Brown thinks Cohen has this a small bit backwards: maybe there is too most talent and so earnings are harder to come by for a gifted many that get into a field. And if a margin compensates we mostly as a percent of income we have underneath government — and not how good we do — good then of course you’d wish to get into a field.  […]

  2. STOCKS FALL: Here’s what you need to know | Business Insider Singapore commented on Jun 30

    […] Josh Brown thinks Cohen has this a little bit backwards: perhaps there is too much talent and thus returns are harder to come by for the talented many that get into the field. And if the field compensates you mostly as a percent of money you have under management – and not how well you do – well then of course you’d want to get into the field. […]

  3. STOCKS FALL: Here’s what you need to know | Business Insider Malaysia commented on Jul 01

    […] Josh Brown thinks Cohen has this a little bit backwards: perhaps there is too much talent and thus returns are harder to come by for the talented many that get into the field. And if the field compensates you mostly as a percent of money you have under management – and not how well you do – well then of course you’d want to get into the field. […]

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