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.  

I often use the analogy of the cookbook written by a famous chef. Walk down the cooking aisle of any bookstore and you will see all of these books that explain in great detail the “secrets” of famous chefs. These cookbooks will tell you all of the ingredients. They will walk you through every step in the process. They will provide color pictures of what the dish should look like and will also provide pictures of intermediate steps. Why would these chefs give up their secrets? 

They provide transparency because they know that their practical knowledge cannot be replicated. The reader’s attempt to replicate the meal often fail. Once readers see the complexity of the cooking process, they will often just go to the restaurant and enjoy their meal at a high price. Transparency creates value. We discussed this in our previous post –Technical and practical knowledge – You need both for asset management”

Mike Lombardi in his book Gridiron Genius discusses “The Emeril Lagasse Theory” as applied to coaching which is also applicable for money management. There are many who have studied and worked for a truly great coach like Bill Belichick or Bill Walsh, but they are often not able to replicate the success of the coaching mastermind. There are many who have studied with Emeril but have not replicated the quality of his cooking. They cannot replicate their mentor’s practical knowledge, drive, or culture. These are Emeril’s true skills.

We see the same thing with hedge fund start-ups where a junior manager decides to start his own firm. Some are successful, but many are not able to match the success of their mentors. There is intangible practical knowledge and culture that is not easily transferable to others. Investment skills such as culture and drive, whether associated with quantitative or discretionary managers, are not always transferable. Investment managers do not have to hide their investment strategy. The strategy does not make them unique. Implementation skills make them unique. For investors, once strategy is understood, due diligence has to focus on a manager’s practical knowledge. Investor should allocate to strategies but back managers with practical skills.