Asset Managers Through The Looking Glass


  • Is there concrete evidence that most asset managers create alpha, or are they just creating beta?
  • Let’s propose a curious experiment based on events in Alice Through The Looking Glass that reverses the whole asset management allocation process.
  • We are likely to find the market is a type of random walk and very few asset managers could possibly be creating sustained alpha.

Given the now huge ubiquity of both mainstream and also alternative fund mangers, the issue of whether many fund managers are really able to generate alpha continues to be a hot topic. My opinion is very few do. Most fund managers instead just create beta – i.e. they take and generate systematic risk and hope that things will turn out for the better. There simply isn’t enough yield or growth in Western economies for any other strategy.

I would therefore like to propose an experiment that might once and for all settle whether most fund managers create any alpha at all (again including the now thousands of alternative managers).

My experiment is derived from a scene in “Alice Through the Looking Glass,” by Lewis Carroll. Carroll describes a scenario where the process of criminal justice is reversed. A person is put in jail first, then tried and then commits the crime (if indeed they did commit the crime). This seems somewhat unfair for if a person did not commit the crime he has been punished for nothing. But as the white King explains to Alice in that case – so much the better, for at least then no crime was committed!

Odd logic indeed, but let’s imagine something similar for fund managers – and this is something that could really be implemented. A manager is told, ab initio, whether he has made a gain or loss on a given position of stocks that he favors, say, over a week. Having found this out the fund manager must then make the investment (which is permitted to be booked one week later). He must make the investment whether he lost money or made it, or else we will say he will get ejected by the relevant regulatory authorities from participating in the market.