Performing Means Different Things in Different Circumstances
While biking recently I exceeded the speed limit.
Quite a biker!
Nope; quite a zone: a 30km/hour zone, on a slight downhill grade.
Context is everything. Take performance in asset management.
I often hear (with a tinge of irritation, like when you try to get off an elevator with a crowd anxious to get in) people talking about the objective of “good performance” as a prerequisite to any engagement with a manager or consultant, without any clarity on how you define good, or how the professionals are allowed to operate in achieving it. I’ve written before about the utility or lack thereof of beating a benchmark (here, in Italian), especially in contexts – most of them – where getting market returns commensurate with the risks taken is just fine. Does it really matter, for example, if you go faster when the speed itself is just barely above that of a man walking on crutches? Because remember that costs money, in more than just fees.
And then, of course, there is the issue of how to properly evaluate how “good” the manager was in achieving any results. This reminds me of an old practice employed by institutional fixed income managers when, in order to beat their benchmarks, they simply went long credit. It worked well until, well, you guessed: it stopped working. And that’s when it dawned on all: what really was their performance on a risk-adjusted basis? Did anyone ever think about it or where they all truly caught with their proverbial pants down? When you’re finished adjusting figures for all the risks taken (absolute or relative to some benchmark) theory says – and reality comes pretty close to confirming – you should really have no true advantage over the market. Or, more simply, if you properly account for all the variables and the underlying risks you almost always come back to the basic position of market returns. But “risk adjusting” is a very complex and mathematically steep task; few are capable of reading the results properly or deriving the right conclusions.
There is really nothing obvious or universal about “performing well”. While the investment management world wants you to think about the whole field as a clock-work type of scientific endeavor the reality is a lot more prosaic and satisfaction hinges on a deep appreciation of one’s objectives and market cycles. This observation recalls a series of questions:
Why so many efforts in doing better than something?
How much is patience worth? (Hint: a lot.)
Why do clients get upset with “static” portfolios?
Can anyone ever stop wanting to trade for excitement?
Is it really so difficult to understand that luck plays a huge role in short time horizons?
How many fads does it take to deplete a portfolio?
Or how many themes?
How many speeding tickets…?