An investor can ask, “Find me the most intelligent hedge fund manager. Someone else may say, “I want the smartest manager in the hedge fund space”. Saying that you want an intelligent manager may not be the same as saying you want a smart manager. There is a difference between smart and intelligent, so says, Heather Butler in the recent Scientific American article, “Why do smart do dumb things, Intelligence is not the same as critical thinking and the difference matters”.
There is no doubt that intelligence as measured by IQ is important, but critical thinking may be more important with making life choices and with being effective on the job. A critical thinker is a good flexible thinker when faced with new problems and who is a skeptic that needs evidence. Critical thinkers are better at overcoming biases in thinking.
Researchers who try to measure critical thinking focus on verbal reasoning, argument analysis, hypothesis testing, probabilistic reasoning, and problem solving. This is not what is measured with an IQ test. So the next time someone tells you a hedge fund manager is highly intelligent, ask if they are a smart person. If given a choice, I want the smart one.
After hundreds of discussions with hedge fund managers, I am still surprised that there is a fear of revealing investment processes under the assumption that someone will steal their ideas and intellectual capital. There are few investment styles that are truly unique and special. What is special is still strategy execution – the practical process of delivering returns. Skill is with the decision-making execution of information and strategy.
All hedge funds are not created equal as the return box chart shows for the post Financial Crisis period. There is a significant amount of dispersion across hedge fund styles. Over the period 2009-2018, the difference between the best and worst hedge fund category is almost 7 percent after we account for global equities and bonds.
The attraction to private equity and other less liquid alternatives is clear from the Guide to Alternatives by JP Morgan Asset Management. The return profile is much higher for private equity and debt funds than more liquid alternatives and global bonds; however, the dispersion in returns is multiples higher than what can be expected from other public categories.
