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.
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.
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.
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.
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
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.
I love how he cites his own paper and declares that his idea is “well known”.