Hedge fund olympics?
When is a sport really a sport? When is an investment process really an investment process? The answer: when subjectivity is minimized. The current Winter Olympics has some proper sports and other events which plainly are not sports. Skiing and speed skating are sports; the fastest wins. Similarly ice hockey, biathlon and curling are sports. Time, goals and accuracy are the metrics.
Conversely figure skating is not a sport. It depends on human judges making biased decisions often at odds with who the audience perceives to be the "best". Low subjectivity is what separates real sports from those that are not. Ballroom dancing isn't in the summer Olympics so why is ice dancing in the Winter version?
Similarly, with investing, if the risks and rewards cannot be objectively quantified then it is not a valid investment strategy. Of all the hedge fund strategies, perhaps the most subjective is long short fundamental equity. Yet, even in this space, the difference between the few skilled and the many unskilled managers is the extent to which the best have eliminated subjectivity. Every metric should be quantified and unless an investment process can be flowcharted where each step proceeds according to strictly defined numerical criteria, then it is NOT an investment process.
Many equity managers' methods can be summarised as buying stocks they "like" and shorting those they don't. Sadly "like" often turns out to be how confident the CEO sounded on the earnings conference call, how many sell-side analysts have buy ratings or the spin of their press releases. All these are irrelevant since they are subjective and therefore of no value. It is all in the numbers and what can be objectively measured. If it can't be counted, it does not count.
Perhaps the most common question hedge fund managers get asked by investors is "What is your edge?". The answer to this should always be numerical. If it cannot be quantified then it is not an edge. Answers of the form "We visit companies", "I used to work at (FAMOUS FIRM)", "I speak (FOREIGN LANGUAGE) so I am setting up a (FOREIGN COUNTRY) hedge fund" are NOT edges. If the advantage can be defined systematically and the risk can be measured, then you have a quantified structured process like a real sport or investment strategy.
Conversely figure skating is not a sport. It depends on human judges making biased decisions often at odds with who the audience perceives to be the "best". Low subjectivity is what separates real sports from those that are not. Ballroom dancing isn't in the summer Olympics so why is ice dancing in the Winter version?
Similarly, with investing, if the risks and rewards cannot be objectively quantified then it is not a valid investment strategy. Of all the hedge fund strategies, perhaps the most subjective is long short fundamental equity. Yet, even in this space, the difference between the few skilled and the many unskilled managers is the extent to which the best have eliminated subjectivity. Every metric should be quantified and unless an investment process can be flowcharted where each step proceeds according to strictly defined numerical criteria, then it is NOT an investment process.
Many equity managers' methods can be summarised as buying stocks they "like" and shorting those they don't. Sadly "like" often turns out to be how confident the CEO sounded on the earnings conference call, how many sell-side analysts have buy ratings or the spin of their press releases. All these are irrelevant since they are subjective and therefore of no value. It is all in the numbers and what can be objectively measured. If it can't be counted, it does not count.
Perhaps the most common question hedge fund managers get asked by investors is "What is your edge?". The answer to this should always be numerical. If it cannot be quantified then it is not an edge. Answers of the form "We visit companies", "I used to work at (FAMOUS FIRM)", "I speak (FOREIGN LANGUAGE) so I am setting up a (FOREIGN COUNTRY) hedge fund" are NOT edges. If the advantage can be defined systematically and the risk can be measured, then you have a quantified structured process like a real sport or investment strategy.
© posted by Hedge Fund on 2:08 AM
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