Wednesday, June 20, 2018
The "Hedgehog and the Fox" revisited - Find managers with big ideas, but diversify
The Greek poet Archilochus wrote, "The fox knows many things, but the hedgehog knows one big thing."
The Oxford philosopher Isaiah Berlin used the fable of the hedgehog and fox as a metaphor for the writing of Leo Tolstoy in War and Peace. In "The Hedgehog and the Fox”. Berlin used the fable as a way to describe thinkers and writers. There are two types, those who define the world through a single idea versus those that have a variety of experiences and cannot be defined by a single idea but by many. Some writers are hedgehogs while others are like foxes. In the case of Tolstoy, he thought like fox and wrote about many ideas but desired to have one big idea. He could not be classified as a hedgehog or fox and this was a source of conflict, a "fox by nature but a hedgehog by conviction".
Since the writing of Berlin in the 1950’s, the hedgehog and fox analogy has gone from a description of thinking to a more negative view on forecasting. Phil Tetlock used the fable to describe types of forecasters. The fox uses many sources of information and thinking to develop a prediction versus the hedgehog who has only a single idea that is less effective at explaining a dynamic or uncertain future.
We think that the original idea of Berlin coupled with the thinking of Tetlock is a useful for describing the thinking of hedge fund managers. There are those that have a single big idea or philosophy for how the investment world may work. The hedgehog could be the systematic trend-follower, the value manager, or the short specialist. The fox is the manager who is the diversifier. He does not have a guiding or unifying philosophy but rather is willing to combine different ideas to find the best strategy or idea to implement. There is no philosophy other than to use what works.
We respect the hedgehog that has the one big idea or can articulate the well-defined strategy but we also realize that a fox may protect us from the failure of the big idea through its flexibility. A key choice of the investor is to either find the fox manager or diversify across a set of hedgehogs. In either case, the single big idea can be costly, so there is value with running with the foxes of Tetlock or bundle a set of big ideas to stay diversified. Big ideas are critical, but it is important to have more than one of them in an uncertain world.