“We’ve long felt that the only value of stock forecasters is to make fortune tellers look good.”  — Warren Buffett

Howard Marks sent out a memo last week – The Illusion of Knowledge – in which he ponders the value of economic forecasts. He concludes that they aren’t worth much to anyone but the forecasters.

As recruiters evaluating senior investment talent we wrestle with a comparable conundrum, how can we make informed judgements about candidates and their success in the future when our knowledge and intuition is based on the past?

Don’t get us wrong, we meet exceptional clients and candidates almost every day – smart successful families, board members, and professional investors at the top of their game.

But interviewing chief investment officers and up-and-comers is a bit like camping with Garrison Keillor at Lake Wobegon, “where all the women are strong, all the men are good-looking, and all the children are above average.”  We have yet to meet a candidate who hasn’t produced top quartile results.

Almost everyone is convinced they can pick superior managers and investments while the other guy rolls snake eyes. Active management is for heroes, indexing for geezers.

In our interviews for institutional and family office clients we often hear the comment that public markets are nearly impossible to beat, yet in the next breath they tell us their endowment or foundation team has consistently beaten public market benchmarks using active managers.

While we are impressed by their conviction, we wonder about their claims.

We’re in good company. Mr. Marks has also questioned the track records of active managers, at least those who place bets on macro trends.  So he sourced a few Hedge Fund Research (HFR) performance metrics for guidance.  This is what he found.

And remember, these are arguably some of the smartest guys and dolls on the Street.

HFs vs. S&P 5-year annualized return*

12.80% – S&P 500 Index

  5.20% – HFRI Hedge Fund Index* 

  5.00% – HFRI Macro (Total) Index

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HFs vs. S&P 10-year annualized return*

13.80% – S&P 500 Index         

  5.10% – HFRI Hedge Fund Index*

  2.80% – HFRI Macro (Total) Index

*Performance through July 31, 2022. The broad hedge fund index shown is the Fund Weighted Composite Index.

You can’t beat Art History

The chart above focuses solely on hedge fund performance.  Large endowments on the other hand, with AUM over one billion dollars, hold on average well over one hundred active managers across the investment spectrum, with some managing close to three-hundred funds (asset managers, commingled funds, and partnership interests, NACUBO Study 2019).

Scott Chan, succeeds Chris Ailman as CIO of CalSTRS

6yrs deputy CIO CalSTRS, 3yrs UC Regents, 5yrs CIO SCERS, 7yrs at 3 hedge funds, 2yrs JPM, MBA Duke, BA UCLA