September 2009

It's official: fund management is not an art...

The days when (hedge) fund managers could say, “It’s a black box,” when asked to illuminate the origins of their funds’ returns were over anyway, but a new white paper released this morning by the manager evaluation firm, Inalytics, and the US-based asset manager, GLG Partners, bangs yet another nail in that particular coffin...

The white paper, which was co-authored by Rick Di Mascio, CEO of Inalytics, and Simon Savage, portfolio manager at GLG, claims fund management is not an art but a skill subject to objective analysis.

“Ultimately we believe that fund management is a skill that can be honed, and so should be developed and nurtured over time,” explains Savage.

Inalytics and GLG, a long-time client of the manager evaluation firm, are particularly keen to steer investors away from the flawed notion that past performance provides any kind of guide to future performance.

“Track records are actually a notoriously unreliable indicator and predictor of skill and the reality is that a period of good performance is just as likely to be followed by a poor one,” says Savage.

One could, of course, conclude from this that good performance is the result of luck, and that fund managers are a bunch of numpties stumbling around in the dark. Unsurprisingly, Inalytics doesn’t go down that scary route. Its white paper instead reassures us that evidence from the Inalytics’ database of managers “shows that skill does in fact exist”.

Phew! But how to find it?

Using two GLG portfolios as samples, Inalytics has developed a methodology it claims can identify whether a manager has skill and if it is persistent.

“By putting fund managers under the microscope and analysing every decision they make, we are able to obtain a clear and objective picture of their DNA,” says Di Mascio. “Our processes lay bare the facts: either the decisions the managers make add value on average or they do not – end of story.”

In the white paper, Inalytics positions its skill-evaluation methodology very much as tool to provide objective feedback to managers and traders as part of a process of continual improvement. However, there will presumably be cases where objective feedback powerfully suggests a particular fund manager might be better off looking for a new career as, say, a plumber.

It all reminds me a little of an interview I heard recently with the celebrated novelist Ian McEwan. When asked if creative writing could really be taught, he said students with talent could be improved, but there wasn’t much help for those without that magic ingredient. In other words, you can teach craft, but you can’t teach, em, art.

Fiona Rintoul, editorial director
©2009 funds europe