Perhaps it is actually harder to pick a manager than to pick investments. The general statistics against active management are well-known. In 2012, for example, 63% of large cap mutual funds failed to match the market (even worse for hedge funds).
As a result, the full choice set for selecting investments includes both asset class as well as manager, and the probability of choosing a good asset class And a good manager is less than a good asset class itself. Given that most investors usually time managers incorrectly, are there some nontraditional metrics which would work?
Tudor's infamous divorce heuristic notwithstanding , what about some more specific methods to pick a manager? How about through the lens of incentives. A manager should be incentivized for long term outperformance.
1) The manager should still be "hungry." If you are already a household name and have "made it" as a big time manager, you cannot have the same drive for performance as before. A key barrier could be $1B AUM, but the idea should be clear.
2) The manager should be focused primarily on investing. If he has a such a large staff that he spends most of the time either buying baseball teams or opening a huge new office which makes headlines.
3) The manager should not be on CNBC etc. enough to be a talking head. If the manager has enough time and/or interest to continually market himself, he/she is too focused on raising money. Raising money/awareness of his/her ideas does not really make performance better.
What other ones could work?
Icon source: http://www.veriswp.com/investing/investment-manager-selection/
I work in the business of picking fund managers and I can tell you that it is all about performance and that means, track record.
Had lunch today with two fund manager selectors today from a BB (GS, JPM, MS). They were pretty cool. They did say that performance was about 99% a factor in their selection process, and that being able to form a relationship with the manger(s) was a plus they really liked because it made meetings/trips out to visit them more pleasurable.
Information ratios don't lie.
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