Edges are Ephemeral

Wall Street Journal:

BOSTON— Jack Meyer trounced rivals when he ran Harvard University’s endowment in the 1990s. But as a hedge-fund manager, he is struggling.

His Convexity Capital Management LP has lost $1 billion of its clients’ money over the last few years as once reliable options trades backfired. Investors pulled more than $3.5 billion from the bond shop last year, its fifth down year in a row. The firm laid off a tenth of its staff in recent months.

This is one of the most frustrating aspects of the investment management business. Performance does not persist and strategies, upon becoming successful, can often start to fail once enough imitators show up or the market wizens up about someone keeping a big, giant edge to themselves. Almost no one has been able to keep their edge in this game over the years. It’s weird that investors expect this kind of persistence from hot managers when they have so many examples in the world outside of finance that demonstrate how unrealistic this sort of thing is.

Let’s just mention professional athletes, as an example. For obvious reasons, investing in Kobe or Jeter after 15 years of stellar performance wouldn’t make any sense to anyone. Why do we think a fund manager’s track record would be any more relevant?

The best managers have been the most adaptable. Warren Buffett went from owning passive stakes in high quality blue chip companies to acquiring them outright (see Burlington Northern Railroad). Then he moved on to becoming a private equity partner in the LBOs of others (see Heinz). Carl Icahn went from options market guru to activist hedge fund. But activism got crowded, so now he’s adapted. The new strategy appears to be making friends with the President of the United States and pushing for favorable regulatory changes to enhance the value of public companies he owns (see CVR Energy). Carl and Warren have been finding new edges and opportunities for decades and decades, but they are exceptional.

Not all investors have the capability of adapting their strategies. Most are more likely to stick to what they’re doing until it stops working, and then they keep going anyway. You can convince institutional investors that you’ve made money for that you’re only cyclically (temporarily) out of favor for a long time before they give up on you, especially if you’re a name brand.

Even if you do attempt to adapt, there’s no guarantee it will work. Lots of long-short hedge fund kings have been unable to generate the type of reliable alpha that has been legislated out of existence by the onset of Reg FD (Fair Disclosure). It just took a decade or so for this to become apparent. And in the meantime, their pivots into macro strategies have been mostly disastrous.

When you’re looking at the performance record of a firm like Renaissance Technologies, it’s tempting to believe that they’ve built an unstoppable alpha machine that could run itself, it’s so consistent. But this is hardly the case. Every day there are hundreds of PhDs and other assorted geniuses showing up to their cabin in the woods to keep coming up with new edges. Because the old ones eventually stop working. There are no alpha machines, there are only tools and systems that may allow them to find alpha somewhere new.

This is not the sort of enterprise in which thousands of professionals and organizations will thrive. There simply isn’t enough room. It’s a small, rarified world with enormous potential rewards being chased by millions. Maintaining an edge is unrealistic, but finding new edges on a regular basis may be even more unrealistic.

Former Harvard Money Whiz Jack Meyer Tries to Regain Midas Touch (Wall Street Journal)


This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.

What's been said:

Discussions found on the web
  1. the best face cream commented on Sep 19

    … [Trackback]

    […] Find More here|Find More|Find More Informations here|There you can find 66531 additional Informations|Informations on that Topic: thereformedbroker.com/2017/04/19/edges-are-ephemeral/ […]

  2. http://bootlegfilmfestival.co.uk/ commented on Sep 20

    … [Trackback]

    […] Find More here|Find More|Read More Infos here|Here you can find 57808 additional Infos|Infos on that Topic: thereformedbroker.com/2017/04/19/edges-are-ephemeral/ […]

  3. clean dryer commented on Sep 20

    … [Trackback]

    […] Read More on|Read More|Find More Informations here|There you can find 75411 more Informations|Infos on that Topic: thereformedbroker.com/2017/04/19/edges-are-ephemeral/ […]

  4. Bulk PK studies commented on Sep 21

    … [Trackback]

    […] Read More here|Read More|Read More Informations here|Here you can find 44811 additional Informations|Informations to that Topic: thereformedbroker.com/2017/04/19/edges-are-ephemeral/ […]

  5. Happier Citizens Immigration commented on Sep 21

    … [Trackback]

    […] Find More here|Find More|Read More Informations here|Here you can find 68620 more Informations|Informations on that Topic: thereformedbroker.com/2017/04/19/edges-are-ephemeral/ […]

  6. 바카라사이트 commented on Aug 13

    […] There you can find 81598 more Info on that Topic: thereformedbroker.com/2017/04/19/edges-are-ephemer… […]

  7. Personalised Drink Bottles commented on Sep 19

    … [Trackback]

    […] Read More on on that Topic: thereformedbroker.com/2017/04/19/edges-are-ephemeral/ […]

  8. immediate edge review commented on Sep 23

    … [Trackback]

    […] Find More Information here on that Topic: thereformedbroker.com/2017/04/19/edges-are-ephemeral/ […]

  9. bitcoin evolution online commented on Oct 03

    … [Trackback]

    […] Here you can find 41590 more Info on that Topic: thereformedbroker.com/2017/04/19/edges-are-ephemeral/ […]

  10. td trust login commented on Dec 04

    … [Trackback]

    […] Info to that Topic: thereformedbroker.com/2017/04/19/edges-are-ephemeral/ […]

  11. replica watches commented on Dec 21

    … [Trackback]

    […] There you will find 54702 additional Information on that Topic: thereformedbroker.com/2017/04/19/edges-are-ephemeral/ […]

  12. replica rolex commented on Dec 29

    … [Trackback]

    […] Find More to that Topic: thereformedbroker.com/2017/04/19/edges-are-ephemeral/ […]

  13. What is DevSecOps commented on Jan 17

    … [Trackback]

    […] Read More Information here on that Topic: thereformedbroker.com/2017/04/19/edges-are-ephemeral/ […]