market folly

Oaktree Capital's Howard Marks is out with his latest market commentary. In it, he details a case study on assessing performance records.

Marks writes: "the ability to ignore relative performance depends on the circumstances and, in particular, the constituencies the performance has to please."

This is an interesting point, because more often than not in markets, investors are fixated on relative performance (comparing returns to the S&P 500 or other benchmarks relevant to their strategy).

If a manager doesn't want to focus on relative performance, Marks says that it's very important he/she effectively manages expectations from the start, or finds an investor base that shares the same vision.

Take an all too common scenario on Wall Street: a manager underperforms a benchmark and flippant investors quickly move their money to the next hot manager. Managers who are constantly compared to benchmarks by their investor base obviously have little to no chance of ignoring relative performance.

Marks then touches on a point that's very relevant to the hedge fund industry:

"In order to survive and have a chance to produce long-term performance, investors have to live up to their constituents' expectations in the short run. Of course, it's important to inculcate reasonable expectations, or to choose clients who have them. But ultimately, the manager's job isn't to make money, it's to deliver client satisfaction, so expectations have to matter."

A prime example of short-term expectations from investors influencing things is Chris Shumway's now defunct hedge fund, Shumway Capital Partners. Shumway returned capital to investors largely because investors were fixated on short-term performance, while he argued his performance was largely driven by taking longer term positions.

Marks makes a bunch of excellent points in his piece and as always his full missive is worth reading. Embedded below is Howard Marks & Oaktree Capital's commentary:




For more from this hedge fund manager, be sure to check out Marks' book: The Most Important Thing: Uncommon Sense for the Thoughtful Investor.

You can also scroll through Marks' past commentaries here.