An interesting perspective on starting a fund today.
“Taleb explains how as funds have become more and more concentrated among a growing group of investment managers he calls the “spurious tail,” it has basically become impossible to be successful in the industry by putting in the work.
You just have to get lucky.”
Read more: http://www.businessinsider.com/nassim-taleb-investment-industry-2012-8?op=1#ixzz23cKK4WOX
Do you agree or disagree with Taleb?
Ouaou! Thanks for the post great read. I think his argument is compelling! Moreover I think it is even more relevant for investors than it is for potential employees. Perhaps the moral for investors would be to look at alternative investments, like private equity where the spurious tail is not as prevalant yet? I do think his article would be more credible if it focused on each asset class (though this could be a good idea for later articles) rather than being as broad-brush as it seems to be by reading the related bit of news-report. Also he doesnt say anything about big losses - as presumably the fat tails he describes extend on either side of the distribution.
I’m not sure I understand the mathematics behind the argument.
So there are some initial managers who have some performance and the ones with the best performance get the most assets. He further argues that as investments become more concentrated in the top performers, then they produce even stronger returns than average. Huh.
I think a better experiment would be to simulate returns from an iid t distribution for a bunch of funds (assuming same mean, variance, dof for all) and create a rule that determines the dynamics of how money is allocated between them that would tend to replicate the distribution of AUM that we see and then simulate it out many periods to see how the distribution evolves.
Agree 100%
The mounting pile of evidence against active management is astounding. And if you think about it active managers have a very, very, very strong incentive to present counter-evidence. But where is it?
Marketing literature should say “Our hedge fund has done extremely well the past 5 years, but all empirical data says we are probably just lucky enough to be in the tail of the distribution of returns and we will most likely underperform the next 5. Won’t you give us all your money?”
All this guy had to say was that the investment industry is becoming super competitive; if you’re not a top manager you’re *hit out of luck. His efforts to add stats to his white-paper is trying to kill a fly with a Bazooka, IMO.
Being Born Wealthy > Being Jewish or WASPY > Born Pretty > Top 5 MBA > CFA > Avg MBA > Born middle class > Born lower class > Born in crack house > Working in IT but looking to switch to buyside
I’ve been thinking along similar lines - that managers with skill perhaps eek out a percent or two above the market returns, but that people who hit a spurious win get the returns-chasing money, and that this is what ultimately gets people noticed.
On the other hand, if you have strong relationships and wealthy people trust you, you should be able to accumulate assets and make profits that way.
You want a quote? Haven’t I written enough already???
i underperformed in the last 12 months….
read both his books
i think he is highly overrated….
Exactly. This isn’t at all the case if what we’ve been taught is true. Paulson isn’t exactly killing it these days, and look how much money he was able to raise.
Stronger SPURIOUS returns are the result. It is not clearly stated in the article, but Talebs paper shows that a highly concentrated industry makes the tail distribution even wider for the “winners.” So as people load up on the outliers, statistically the outliers will become even larger. But it is still spurious outperformance. I believe this is his point.
And obviously it does not hold across every individual manager, Paulson being an example.
The rules don’t apply to me. I’m special.
Cities teem with evil and decay, let’s give it a good shake and see what falls out!!
Paulson outperformed for over 10 years……
so the spurious tail performers’ results are driven by luck, yet they will continue to pertpetually gain market share? Isn’t that a contradiction? Seems more plausible to me that the concentration of funds with these managers is just setting up for an ever bigger kaboom. One also has to consider the conditions under which these 100 standard deviation returns are possible. I’d guess there is some amount of leverage involved.
KISS MY CONVERSE.
As people load up on the outliers, then the AUM managed by the people who previously had outlier performance will be higher. That doesn’t necessarily mean that they will be outliers going forward. The only difference is that on an asset-weighted basis they have more weight.
this.
hard work + talent = success
ACEaceAnaltiCalteEquityACEanalticalteequityACE
http://tinyurl.com/axn8cua
aceofheartscapitalmanagement@_____________
the thing i really didn’t like about his book was his undertone of jealousy and envy….he seems to talk with disdain about ppl who were simply more brilliant and talented than he is…..he ascribs other people’s success in investing to luck, but funny nobody is asking him what he is investing in (at least i haven’t come across anything notable)….
Flows are fickle. Paulson, Berkowitz, Growth Fund of America all faced (or are still facing) massive outflows. As soon as performance tanks investors flee.
Unfortunately, you have to build a great track record to get the flows to begin with. By the time you’ve had five years of out-performance and raking in the flows, you’re due for a big relative correction.
In additon, the larger a fund becomes the harder it is to outperform. There’s a natural ceiling to the assets you can raise in any given product (unless your name is Bill Gross). Once the fund ballons to a certain size performance suffers and investors leave.
This isn’t really a new development. You can still be a successful PM and raise assets.
Funny how that works huh?
This guy is over rated, I care more about investment process then what some number crunching wonk says about probability distributions.
The crux is the first sentence of his paper:
“The idea is well known (see Taleb 2001), that as a population of operators in a profession marked by a high degrees of randomness increases, the number of stellar results, and stellar for completely random reasons, gets larger.”
If you accept this as true then the rest of his paper makes sense (mathematically, logically and so in real life.)
But look how carefully he words that. “The idea is well-known”. Not that “It is well-known”. There is no way to prove or disprove that stellar results for individuals were random. Saying “the number of persons who
rise to the top for no reasons other than mere luck, with subsequent rationalizations, analyses, explanations, and attributions.” is fucking ridiculous. It’s like saying that anything that APPEARS random IS random rather than acknowledging that YOU don’t understand how it works, so it appears random to YOU.
(To be clear, I am not disputing that short-term price changes are random, but rather that this randomness is the ONLY cause of stellar performance.)
I had a similar discussion in another thread where people were calculating the probability of passing CFA in 3/3 tries. Just because it involves fractions (pass rate = 0.4, 0.4, 0.5 give or take) and sum to 1, doesn’t mean it’s a probability distribution. Just because poker involves chance doesn’t mean there are no superior poker players.
--
One Rec Ho
I love how he cites his own paper and declares that his idea is “well known”.
Cities teem with evil and decay, let’s give it a good shake and see what falls out!!
“It is well known that I am never wrong (see Me, 2007). Others have been right in the past, however it was only because of pure luck.”
You want a quote? Haven’t I written enough already???
I read studies that say that as the fund gets bigger its performance suffers. Harder to get into and out of trades the bigger you are. Also, it’s harder to invest in the best asset class to generate alpha (microcap).
Studying With
At least a year ago when I read his book, he was running a fund and advising clients. I think this article discusses it: http://online.wsj.com/article/SB122567265138591705.html
There was also a youtube video where he discussed investing strategies. I remember the hedging part having to do with extremely out of the money options on certain index levels.
I think there is some truth to what he says. But then there are some notable exceptions. But at any rate, I find it useful to listen and try to adapt accordingly – even if I’d like to be able to prove him wrong ha ha
Studying With
I think he and Blake should get together and brainstorm to solve the worlds problems.
I don’t see why this should deter any of us from being in the investment industry. Maybe we’ll get lucky.
Who this article should really be aimed at are people like endowments and pension funds.
Formerly ChickenTikka - Member of the Order of the Righteous Rusty Hacksaw
lol classic. I wish he could read this.
From the article I can gather that he sniffs his own farts, almost as frequently as he googles himself, so hopefully he stumbles on this.
The message is simple, but the guy is incredibly high on himself. All of his books and articles for decades have boiled down to 2 points:
1. Survivorship bias
2. Nassim Taleb is smarter and more awesome than you (even though nobody is supposed to be smarter than anybody else)
This is a huge factor. There are small / microcap funds that have returned 30%, 40%, or higher compounded annually over extended time periods (decade plus). The strategy does not scale past a few hundred million though, and definitely not past $500 million – the names are just too illiquid. That said, it’s not about luck, there is a method or system that can be reproduced by someone with sufficient skill. If you’re managing 10 billion, however, then by definition you have to be in liquid stuff, and that stuff is much more competitive and efficient.
“I lost my wife to a margin call. Wives get mad when you come home and say, ‘Sweetheart, I lost the house today.’” - Dennis Gartman on trading mistakes
So is Taleb gonna be the first one to get out of the investment industry?
I really enjoy Taleb’s way of thinking. He is smart in a creative, independent way.
But sometimes I get the impression that he is trolling himself.
His books have sold millions of copies. If you should ask him about it - Im not sure that he would say that it’s actually a Black Swan.
his books were not even enjoyable……i would not recommend it…..there is a few good ideas here and there….
I thought his idea of black swans was definitely interesting and worthwhile - especially the black swans that happen simply because they’re not supposed to happen.
Cities teem with evil and decay, let’s give it a good shake and see what falls out!!
Pages