Art, forgery, and money management

Money management has been compared to art. There is a technical skill component to generating returns but there is also an artistic component with how information is weaved together to produce a successful portfolio. Money management can be like art because it may have uniqueness that transcends rules. You can have all of the rules, read all of the books on how to do it, and still not get the results that are expected. Now, we believe that artistic uncertainty can be minimized through good checklists, but we accept that for many, money management as art is real.

Given there is an artistic component, should we expect that there will be forgery of this art? A fascinating article in the FT "How art detectives hunt down fakes" on art forgery led me to thinking about this issue in finance. A forgery is a copy or fake of the real thing. There can be forgery in money management when someone tries to replicate what others have done and pass it out as authentic. A money management forgery can be created through using the words and techniques of someone who has real skill but not actually doing all of the work. Or, it could be trying to copy the style of another manager without adding any originality. There could be some good managers who, like painters, are able to use their skill to replicate what a great master has already done and pass it off as the being reality. Forgeries create a replica of the skills shown by the masters. The forger may use the same tools and same techniques to generate returns, but they really don't actually mimic the real skill. They can come close to a master but not make it exactly the same.

The only way to detect the real thing from a forgery is through deep due diligence of every detail of a work. The same can be said for money managers and hedge fund managers. The due diligence is necessary to detect what is real from a slick copy. The due diligence will tell us if all of the processes and skills are being employed or whether corners are being cut. The forger can be found through the hard order of understanding the artist style and technique. Isn't that one of the key skills of due diligence? Due diligence employs careful analysis to find those money manager artists who have skill and are real and separate them from those who are fake.