A number (maybe 15 or so) of years ago, when I first emerged on the speaking circuit, I gave a talk about hedge funds to a CFA society in Texas. I presented an hour of education on the topic, touching on everything from Long Term Capital Management and blow up risk to fee structures, performance, asset allocation and portfolio construction benefits. At the conclusion of my formal remarks, I took a few audience questions.
At the very front of the room, a distinguished looking lady, somewhat advanced in years, raised her hand to lob the first query.
“Do you have your PhD?” she asked.
“No,” I replied.
“Do you have your MBA?” she inquired.
“No ma’am,” I answered a little more dubiously.
“Your CFA?” she persisted.
“Um, no ma’am,” I said somewhat sheepishly.
“Well, for someone with no education, you gave a marvelous presentation,” she smiled.
It was, is and perhaps always shall be the best backhanded compliment I’ve ever received.
It is kind of funny to think about that episode now. Had this lovely lady known about my evidently deficient education before signing up for the event, she might not have attended, and yet she professed to both enjoy and learn from my remarks.
Or maybe it isn’t so funny. In the investment industry generally, and specifically when it comes to fund managers, you often hear about pedigree. When a new fund launches, talk inevitably turns to where the manager went to school, where they worked, who they worked with and all of the check the box factoids that determine if a fund manager will be hot or not.
It’s become so commonplace to see a specific road to success (at least from a fund raising perspective) that it probably doesn’t even surprise you that 40 percent of venture capitalists went to Harvard or Stanford.Hedge funds also find a large number of their stars at Harvard and Stanford, too, but also frequent the University of Pennsylvania, Cornell and Princeton.
In truth, the emphasis our industry puts on pedigree can be a bit daunting for those of us who didn’t grace the hallowed halls of Harvard or Yale, or who never managed a prop desk at Goldman Sachs. It also may be costing us money.
In a study of venture capital firms, Harvard Business School (yes I’m now quotingHarvard, sue me), found that VCs that went to the same undergraduate school were 34.4 percent more likely to invest together, but the probability of their success (defined as an IPO for this study) actually declined by 19 percent if they both claimed the same alma mater.In addition, the chances of a successful IPO declined by 17 percent if the co-investors worked at the same firm, even if it wasn’t contemporaneously.
Likewise, a 2016 study by Oleg Chuprinin and Denis Sosyura (neither from Harvard) found that hedge funds run by individuals that grew up poor (bottom 20 percent of households in terms of wealth) outperformed those managed by managers from the top 20 percent by over 1 percent per year.I certainly can’t speak for everyone, but as someone who grew up “powdered milk poor” it never occurred to me to apply to Harvard or Stanford because, regardless of whether I could get in, I knew I couldn’t have paid for it. I’m betting some of these outperforming managers found themselves in the same (poor) boat.
And of course, all of this thoroughbred nonsense was magnified recently by the epic college entrance cheating scandal that unfolded in the US, which gave a glimpse into how pedigree can be manufactured if you know the right people and have enough money.
This wasn’t even news to me. Once upon a time, before I ever entered (or even thought of) the investment management industry, I helped research undergraduate applicants of means to determine if “special attention” was warranted in the admissions process. To my knowledge, there was no cheating or anything improper involved in the process – no one was provided admission that didn’t meet basic admissions criteria – but I do know that if it was a close admissions call, every effort was made to, um, clarify the situation before a negative result was delivered.
Look, I’m all for a good education, y’all. I certainly got the best one my powdered milk upbringing could afford, but I’m also not naïve enough to think that everyone has the same opportunity to go to Harvard or Stanford, and from there to Goldman or B-school. Sure, there are scholarships and opportunities out there, but their numbers are finite and what is covered varied.
And if the research shows that the vaunted pedigree that investors search for is actually a potential source of underperformance, then maybe it’s time to expand our horizons. As I’m sure many of you know, there are a ton of very good dogs out there, and not all of us have papers.