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Suppose a mutual fund had alpha of 7.1%, beta of .8, and R-Squared of .44 (relative to the S&P 500). What inferences would you make of the fund manager's performance in light of these statistics? To what extent do these suggest a "skilled" or "lucky" manger?

8 Comments
 

Well, I would want to know what the 1 Year performances were for 2006 through 2009 before I could make an opinion, as well as the metrics you gave.

 

Assume this is the only info available--unrealistic but, again, this is only hypothetical. What I am asking for is not whether you would invest in a fund knowing only these stats, but what general impression these stats give.

These are not Bernie Madoff's results...but if the aggregate stats seem like they could be Madoff's, perhaps this means the initial impression you get is a favorable one? I am asking because I understand Alpha/Beta/R-Squared each as individual metrics but don't know how they relate to each other and should be interpreted as a whole (ie., if the Beta and R-Squared undercut the Alpha somehow).

 
Best Response

If this is the only info available, then the answer is no. If the guy can't provide me with the info I'm looking for, particularly as a mutual fund, then I don't give a fuck how good his returns are. The first rule of investing is think like the worst client you can ever think of dealing with who asks all the questions and wants to know what's written on page 243, paragraph 7 of the prospectus. It's an absolute truth I learned from a guy who made all of his money investing in the markets. He told me this on day one when I pitched him my first idea. He said "If I don't know what a company does or like what they do, I won't touch them. If I don't understand a strategy and no one can explain it to me in simple English so that my 10 year old grandson understands it, I won't touch it. If I want to invest in a fund, I want to see a track record or I won't touch it."

Doesn't matter. I stick by it. I need more info on it because I would rather be wrong and sleep soundly at night than be right and end up fucked. Lessons to live by man...

 

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