Piggyback investing has made it so easy for investors to mimic the moves of the best and brightest — and most successful — asset managers. The hardest part is figuring out whose portfolio moves to clone.
Today’s Bloomberg deals with the issue of super star, celebrity fund managers and a recent study into their performance. It turns out that media coverage of these glamor traders is negatively correlated to their performance:
Hedge funds with media coverage underperform no-coverage funds by 3.5 percent annually over 1999-2008.
The study by Ozik and Sadka postulates 4 possible reasons for this underperformance:
- Media coverage is predicated on past results and therefore like looking into a rear-view mirror. Many of these stars have their best days behind them.
- Star managers are money magnets, attracting too much money to be put to work profitably. This has been shown to be an issue for fund managers — mutual and hedge — alike. Highest conviction ideas have been shown to outperform entire portfolios because of the too-much-money problem.
- They begin believing their own hype and essentially blow themselves up. Listen, everyone in this game is vain to some extent. Otherwise, only index funds would exist. Top managers are no different.
- Some may just be better at getting publicity than they are at investing. This is a truism of the industry, in general. Performance doesn’t always beat media presence and many of the top firms do better marketing themselves than they do earning returns on their clients’ monies.
But the article kinda stumbles on its closing remarks:
The lesson is clear: As soon as a hedge fund acquires any kind of serious publicity, its glory days are over. Some will get too big, others will become obsessed with their own legend.
A big media presence may not be the cause of underperformance — that may come from any one or combination of the reasons the academics mention. Rather, mediocrity may be just the result of the large media presence. Correlation is not causation — so let’s not think that all PR is bad for fund performance.
Disclosure: No positions