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.


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

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