Alpha Wounds
Jason A Voss, CFA, has identified a number of “wounds” that limit investment firms’ ability to produce alpha. These are things done by investment managers to themselves, as well as by investment adjuncts like consultants, manager search firms, and academics.
This series is meant to usefully identify them and help you avoid them.
Active managers are often viewed as Sherlock Holmes-style detectives gathering facts, interviewing witnesses, and developing theories to inform their investment judgments. In the latest edition of his Alpha Wounds series, however, Jason Voss, CFA, argues that this perception rarely reflects reality.
Jason Voss, CFA, discusses the importance of aligning investment firm culture with investment philosophy to maximize alpha.
Short-termism is a major alpha wound that hurts the performance of active investment managers. Short-termism leads to higher trading costs, makes it harder to properly evaluate the management of businesses, imposes time constraints that prevent investment strategies from reaching full flower, and increases bias. New research demonstrates this pressure is coming from clients rather than from investment managers themselves.
Passive investing is not actually passive. When looked at this way, it means there are important lessons for active investors. Examples include the hidden story behind market capitalization and the importance of low turnover. This also opens passive investing up to criticism regarding the free passes given to it in terms of risk, cost, and momentum.
Investment managers believe in diversifying their portfolio of investments, but what about their human resources portfolio?
One of the reasons active investment managers compare poorly to passive ones is bad methodologies on the part of investment industry adjuncts.
Active management is under siege from many corners. Yet many of these alpha wounds are self-inflicted. Chief among them is benchmark idolatry.