ONE OF the great paradoxes of the way that we invest money professionally in this country is that those who are best placed to spot and act on the long-term trends that ultimately determine investment performance are required to spend most of their time trying to identify and chase short- term price movements instead.
Keynes likened the business of investment management to a beauty contest, in which the judges are engaged not in choosing the girl they think is the prettiest, but the one they think their fellow judges are most likely to choose. If the telecoms, media and technology sector rises 50 per cent in six months, as happened over the winter of 1999-2000, then woe betide the professional fund manager who knows that it is all a fad and that saner counsels must eventually prevail.
If he fails to go with the crowd, his short-term performance figures will suffer and all that year's new money from investors, which is highly correlated to where the action has just been, rather than where it may be in the future, will go elsewhere. Only the bravest or most independent money managers can afford to buck the economic imperatives of the industry, which favour fashion-chasing over the pursuit of longer term moneymaking insights.
Yet just because almost all money managers have to play the relative performance game, it does not mean that their insights are either wrong or wasted. The paradox of the past few years is that the flow of talent into the money management business has been growing just as the scope for managers to exercise their discretion has been reducing, thanks to five years of predominantly momentum- driven markets.
The most compelling arguments for looking at hedge funds as a way of investing, in my view, are not the ones that are often deployed in their favour, such as their low correlation with mainstream markets, the ability to go short as well as long, and so on. Rather it is that they mostly require the managers of the fund to put their own money where their mouths are, and reward them accordingly. With a structure of this sort, which equates the interest of the manager more closely to that of the investors, you are more likely to see your money invested in accordance with the way the manager really thinks the world is developing, not just in the way that others have decided it seems to be going. You are also more likely to find the manager enthusiastically engaged in his (or her) day-to-day job if he is free to back the judgements you are paying handsomely for.
When tracking the views of professional fund managers, in an effort to spot future emerging market trends, I have certainly found that it pays both to spread the net as widely as possible and to discriminate heavily between those who can and those who cannot afford to manage their funds in accordance with their personal convictions. Hedge fund managers feature disproportionately in this list, though they too are by no means immune to performance pressures, in this case largely driven by the inflated expectations of their investors as to the scale of the returns that are realistically achievable.
One fund manager who has given me a lot of valuable insights over the years is Crispin Odey, whose flagship European hedge fund Odey European, after an adventurous first few years at the riskier end of the fund spectrum, has matured into one of the best and most successful of its kind, with excellent risk-adjusted returns. …