Crystal ball discovered? New model forecasts manager success
| Apr 15th, 2007 | Filed under: CAPM / Alpha Theory | By: Alpha Male |
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Active managers – particularly hedge fund managers – are notoriously inconsistent. This fact is often held up as proof of efficient markets. The assumption: all managers eventually “revert to the mean”, “hot hands don’t last”, and “what goes up must come down.”
As a result, endless resources have been poured into the quest to find some way to predict manager performance other than to simply rely on historical returns. Naturally, such a finding could be lucrative for advisers – particularly those who benefit from the performance of other managers like, say, funds of hedge funds.
The latest attempt to do this has some intriguing possibilities. In a paper published in this month’s Journal of Finance, Marcin Kacperczyk of the University of British Columbia and Amit Seru of the University of Michigan propose a new metric called the “Reliance of Public Information” (RPI) to measure the extent to which a manager’s performance is correlated – not with the markets – but with “public information” (captured by consensus sell-side analyst recommendations). More…
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