Gustavo Ballvé on July 26th, 2013
Food for thought, Home, Mental models, Portfolio Management, Risk management

Probably the most re-tweeted and linked-to article today, this piece by Jason Zweig called “Plenty to Blame for High-Pressure Hedge-Fund Culture” rings a major bell with me: the (ir)responsibility of investors. Apologizing for the spoiler, the main point is summarized in the last paragraph: “Yes, plenty of hedge funds are guilty of exploiting their clients with lavish fees for flaccid performance; some might even be breaking the law. But their clients are far from blameless: “Sophisticated” institutional investors still insist on believing in a Tooth Fairy that can somehow miraculously provide market-beating returns for everyone. Maybe that is the biggest crime of all.”

Another point that should be made is: forget “blame”! “Blame” comes after something goes wrong while the process can be flawed even if it all goes according to “plan”. What I mean is that the search and analysis of irresponsible processes (not outcomes) should be an ongoing activity for investors of all sizes (retail, private-banking, funds of funds, allocators, institutional etc.).

I’m always reminded of a workplace safety video my father brought home when I was maybe 10 years old and had a huge impact on me. Its main message was that accidents that ALMOST happened should be counted (and studied) as actual accidents. That’s because the difference between “near-accident” and accident usually boiled down to luck and other uncontrollable variables, while the causes of near- and actual accidents were usually controllable and, more importantly, avoidable – by using simple changes, signs, safety gear etc., but also by enforcing these measures ruthlessly.

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