Good Job!
March 1, 2018·0 comments
The mathematical tools investors use to identify skilled managers worked perfectly for decades, then stopped working entirely around 2009. Active managers still tell the same stories about capturing upside and limiting downside. The data just stopped proving them right. What happens when the evaluative systems we trust to distinguish real competence from performance theater break down, and we're forced to decide who's actually good at their job without the comfort of the numbers?
- The same methodology that revolutionized baseball analysis can be applied directly to investment management.Wins Above Replacement in sports translates perfectly to Performance Above Replacement for active managers, measuring whether they outperform a readily available passive alternative. It's empirically sound, mathematically elegant, and should work.
- The system completely collapsed around 2009, and it hasn't recovered. Hedge funds now underperform the S&P 500 by historic margins. Managers who supposedly demonstrated "convexity" (capturing more upside than downside) no longer do. The metrics that identified skill became noise.
- Central bank balance sheets grew to $20 trillion, swamping every algorithmic signal about manager performance. The Three-Body Problem took over. Any mathematical understanding of how markets work when central banks are the dominant player becomes instantly obsolete, and the evaluation tools built for normal markets can't function.
- Investors responded by giving up on active management entirely, which is itself an active management decision they're probably not equipped to make well. Treating passive index selection as a default rather than a choice is a form of abdication that carries its own risk.
- The answer isn't better statistics or more sophisticated algorithms, but something much harder: evaluating whether managers have the courage, humility, and behavioral integrity to know what they're actually good at and adjust when it stops working. You can't calculate this with a Sortino ratio.
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