Last week came the news of the acquittal of a fund manager who lost a lot of money for his clients by investing in Bernie Madoff’s fund. The judge in the case justified the action on the grounds the manager “did not violate his duty of management” and his belief in Madoff’s products was “legitimate”. (See this FT article for story and background.) Recall that Madoff had manufactured a very strong and stable performance record over a period of decades.
How can you make sure a string of numbers associated to any investment fund or product is real – even if not fraudulent? The judge in the mentioned acquittal speaks of duty and legitimacy, but the number of duped investors was enormous, including many in the professional field of asset management (mostly through “feeder funds” or “funds-of-funds”). An interesting side note to the saga is that while Bernie Madoff and most of his team have been found guilty of fraud, amazingly not one of the managers who channeled clients’ money to them has received the same treatment.
When you look at performance you always have to think about the possibility the figures are purely the result of random events. Nassim Taleb in Fooled by Randomness did a wonderful job in talking about the role of the unpredictable in our lives (the book is highly recommended). And for this reason, almost over anything else, all performance figures need to be treated very carefully: we often don’t have enough time to figure out if they show real skill or pure luck