We know the answer to success. If you want to get
good at something you have to focus and do the work. Is this focus measurable
in money management? Similarly, can we say something about manager focus
through time? An interesting piece of new research looks at this problem in the
paper, Diseconomies of scope and Mutual Fund Manager
Performance.
This research finds that as the responsibilities of
the manager become broader, there is a negative impact on alpha generation.
There are diseconomies of scope which are different than just scale. The worst
thing that can happen to a good fund manager in terms of alpha generation is
that he is given more managerial responsibility. Good traders may not be good
firm managers. The intensity or focus that may make someone a good fund manager
falls when their scope of responsibilities is enhanced. A manager rewarded with
more scope hurts fund investors.
The paper measures alpha against changing expansion
and contraction of scope for a broad set of mutual funds. Good alpha managers who
are given increases in the scope of their responsibilities see a decline in
their ability to generate more alpha. Those managers who have poorer alpha
generation and have a cut in responsibilities or scope see an improvement in
their ability to produce alpha. There are limitations with extrapolating the
conclusions from this work and applying to hedge funds, but the intuition and
basics results seem to be transferable.
Without making too broad a generalization, you don't want a manager who
goes out and gets a hobby or anything that takes away from a focus on alpha
generation. You don't want a manager who adds too many analysts and staff as he
grows. You don't want to use managers who have distractions from his core
business. You do want managers who are focused and boring. A well-read global
research or quant specialist is a positive. A renaissance man with many new interests
who also manages his organization should not be a choice for investors.
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