Traits of a good Fund Manager

What makes a good Fund Manager? Does good grades and high qualifications like a MFE/CFA/CAIA qualify and determines one to outperform the market? If these were true, Long Term Capital Management (LTCM) would not have gone bust: Read http://en.wikipedia.org/wiki/Long-Term_Capital_Management

LTCM had all the ingredients for success - huge capital inflows, solid backing, Nobel prize winners, scientists, Harvard professors, bankers etc. For more recent cases, just take a look at Lehman Brothers: Read http://en.wikipedia.org/wiki/Lehman_Brothers

Why pay fancy fees to these people and why are they so "special"? Does it make you feel good that when you lose money, you can just say - "Hey, even the professionals are underperforming and if it had been me, I could lose more". Now, this theory is absolutely untrue and since the money is yours to begin with, why put your hard earned savings with all these "professionals"? I can swear with my balls that 80% of professional Fund Managers underperform. You could be better off just putting your money in index ETFs that track the market and ETFs have lower fees.

Now, don't get me wrong here as I believe there ARE some Fund Managers who can outperform the market consistently but how do you know one when you see one?

Track Record

Before choosing a Fund Manager to invest with, research on their track record back dating to as far back as possible. Analyse how his/her fund perform during Bull and Bear markets as this will show how shrewd and whether his/her investing style suits you. The key point to look out for is how their funds perform during times of uncertainty/crisis/turmoil. During bear markets, their funds should typically keep their losses minimal and during bull markets their funds should outperform the market.

Alpha

 

An important measure of a fund manager’s value is the “alpha” that they can add. “Alpha” is the measurement of how much more the fund manager adds to the value of your investment than if you had simply invested in an index fund. An index fund attempts to mirror the market by investing across all shares in the share market index

 

Comparison with Index

 

Index funds charge lower fees as they have much lower research and analysis costs. Also, they are not claiming to outperform the market. Therefore, if you choose to pay the higher fees to get the out performance and higher returns, be sure that the fund manager is not merely a closet index fund, following the markets.

 

 

Eating your own cooking

 

Choose funds whereby the fund manger has their own money in it as this will ensure that he/she will not take excessive risks to generate alpha. Read http://www.investmentnews.com/article/20150122/FREE/150129970/gross-eats-his-own-cooking-at-janus-putting-more-than-700m-in-his