Chasing Performance and Identifying Talented Investment Managers

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.