Abstract
A common refrain from investors is that they have bad luck in hiring investment managers. Their managers’ post-hire performance tends to be disappointing relative to their pre-hire performance. This may be because of performance-based hiring and firing. The literature documents the practice of chasing performance. This article illustrates that the probability that a talented manager’s performance will exceed the best in a pool of untalented managers can be surprisingly small, even for long time periods; hence, chasing performance is unlikely to result in choosing the best managers. This article also provides a framework for mitigating the detrimental effects of chasing performance.
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In this issue
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- Article
- Abstract
- LITERATURE REVIEW
- THE PARABLE OF THE UNTALENTED INVESTMENT MANAGERS
- REAL LIFE: TALENTED AND UNTALENTED MANAGERS
- WHAT THE INVESTOR SHOULD FOCUS ON AND SEEK
- BAYES’ THEOREM, THE CONDITIONAL PROBABILITIES OF THE CAUSES OF AN EVENT
- THE TRADITIONAL STATISTICAL PROCEDURE FOR DETERMINING TRUE ALPHA
- TWO EXTREME EXAMPLES THAT ILLUSTRATE HOW BAYES’ THEOREM CAN HELP
- TWO ILLUSTRATIVE EXAMPLES of HOW BAYES’ THEOREM CAN HELP
- ASSESSING AN INVESTMENT PROCESS’S A PRIORI PROBABILITY OF POSITIVE TRUE PERFORMANCE
- CONCLUSION
- ENDNOTES
- REFERENCES
- Info & Metrics