Still reading this but about your posed q: "how do you evaluate a manager who has invested in several frauds/blowups but has a good track record?"
Depending on the way they blew up it can be a strike against or not relevant. Also depends on the manager's stated strategy. For example; you're evaluating some black-box quant thing (about the…
Still reading this but about your posed q: "how do you evaluate a manager who has invested in several frauds/blowups but has a good track record?"
Depending on the way they blew up it can be a strike against or not relevant. Also depends on the manager's stated strategy. For example; you're evaluating some black-box quant thing (about the same thing for us value guys trying to evaluate ARKK :)
If they state their strategy outperforms because their engine picks up fraud and then they blow up a position on a fraud... that's bad.
But if it's a momentum quant it's kind of par for the course.
If it's not a quant strategy essentially the same rules apply.
One more thing about manager selection. It is just much easier to ascertain a great manager if they have a strategy that relies on hitting singles or some mean reversion strategy. It is also much easier if they don't concentrate.
If they concentrate and generate the VC distribution of outcomes, yeah... I just think there's no way (from the track record) to find out within a lifetime whether it's luck or skill.
I'm a big fan of ascertaining skill from materials put out there (writing and/or talks) however this can also get you into trouble because there are amazing storytellers with no alpha.
Final point. It is also a bit easier to ascertain skill if a manager is active in an arena where the variability of results between the best and worst managers is very high. The distributions are wider and there are more inefficiencies to take advantage of. I do think the skill translates to other environments. People sometimes argue the advantage came from the environment. That's true but the manager is still skilled. That doesn't mean it will be enough for huge returns if you have to apply it to S&P 500 only.
Holding controversial positions is a positive sign. I believe that's a predictor of some alpha (could still not be enough to cover fees).
Concentrated positions (or actually deviations from benchmark) are a positive sign. However, I really don't agree with the notion that's popular on Fintwit where everyone is looking to concentrate into positions and run a concentrated book.
As a manager, in my very humble opinion, you should always be looking to concentrate towards your best ideas but have a great preference to be highly diversified. Concentration should happen because you find things and you just can't do anything else. The opportunity is SUCH A LOCK you just have to upsize. You can't ignore it and then you hate it but you do it.
But not the other way around where you go looking for 5 things and pile 20% into each. That's one of the worst portfolios imho. It could be somewhat acceptable for an activist team.
TLDR: not necessarily a red flag and not really a sign either.
P.S. With ARKK there's a "control" period which is K.W. time at A.B. The volatility is somewhat similar. The returns aren't. That data isn't as valuable as the more recent data but I'd include it to do any performance analysis. Still, it probably isn't enough given her style.
P.S. II talking about ARKK and signs; analyst turnover is probably a negative sign.
Still reading this but about your posed q: "how do you evaluate a manager who has invested in several frauds/blowups but has a good track record?"
Depending on the way they blew up it can be a strike against or not relevant. Also depends on the manager's stated strategy. For example; you're evaluating some black-box quant thing (about the same thing for us value guys trying to evaluate ARKK :)
If they state their strategy outperforms because their engine picks up fraud and then they blow up a position on a fraud... that's bad.
But if it's a momentum quant it's kind of par for the course.
If it's not a quant strategy essentially the same rules apply.
One more thing about manager selection. It is just much easier to ascertain a great manager if they have a strategy that relies on hitting singles or some mean reversion strategy. It is also much easier if they don't concentrate.
If they concentrate and generate the VC distribution of outcomes, yeah... I just think there's no way (from the track record) to find out within a lifetime whether it's luck or skill.
I'm a big fan of ascertaining skill from materials put out there (writing and/or talks) however this can also get you into trouble because there are amazing storytellers with no alpha.
Final point. It is also a bit easier to ascertain skill if a manager is active in an arena where the variability of results between the best and worst managers is very high. The distributions are wider and there are more inefficiencies to take advantage of. I do think the skill translates to other environments. People sometimes argue the advantage came from the environment. That's true but the manager is still skilled. That doesn't mean it will be enough for huge returns if you have to apply it to S&P 500 only.
Holding controversial positions is a positive sign. I believe that's a predictor of some alpha (could still not be enough to cover fees).
Concentrated positions (or actually deviations from benchmark) are a positive sign. However, I really don't agree with the notion that's popular on Fintwit where everyone is looking to concentrate into positions and run a concentrated book.
As a manager, in my very humble opinion, you should always be looking to concentrate towards your best ideas but have a great preference to be highly diversified. Concentration should happen because you find things and you just can't do anything else. The opportunity is SUCH A LOCK you just have to upsize. You can't ignore it and then you hate it but you do it.
But not the other way around where you go looking for 5 things and pile 20% into each. That's one of the worst portfolios imho. It could be somewhat acceptable for an activist team.
TLDR: not necessarily a red flag and not really a sign either.
P.S. With ARKK there's a "control" period which is K.W. time at A.B. The volatility is somewhat similar. The returns aren't. That data isn't as valuable as the more recent data but I'd include it to do any performance analysis. Still, it probably isn't enough given her style.
P.S. II talking about ARKK and signs; analyst turnover is probably a negative sign.
this is a really thoughtful comment; thanks
I'm not aware of the analyst turnover at arkk; can you point me to what your'e seeing?