5. Recency effect/bad timing: The famed investor Charlie Ellis pointed out that:
Data from over 35 years of behavioral research on individual managers at institutional funds show that large numbers of new accounts go to managers who have produced superior recent results – mostly after their best-performance years – and away from underperforming managers after their worst-performance years.
Mean reversion may have been a huge factor. As Donald Steinbrugge, of Agecroft Partners, explained, there have been nine years of increasing flows to funds, with most coming from redemptions to other funds.
Finally, my theory: the Great Reset. The combination of the financial crisis, the bailouts, zero-interest-rate policies and quantitative easing were all factors, for sure. But I suspect many have overlooked the cathartic impact of a once-in-a-generation, full-blown capitulation during the first quarter of 2009.
The effect of that huge sell-off was a full reset — a reboot and brand new game. All of the misallocated capital was wiped out, all of the investor leverage gone. And what changed completely was the cycle — whatever the prior gestalt was it was replaced by something new and entirely different.
People were very slow to recognize this.
Post-crisis, a new world emerged. What worked before just stopped working. That moment of capitulation was when all of the old playbooks should have been tossed aside for something new.
Every era is different. It might have been a lesson few learned. Hedge funds are no different.
This column was provided by Bloomberg News.