Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 40

In Boston, new ideas and evolving organisms

Conferences, those somewhat theatrical groupings of friends and foes, competitors and co-operators, of those seeking new opportunities and those there for a ride, are ripe for a sociological study. As a speaker at the recent Global Absolute Return Conference in Boston, I was struck by the ritualistic nature of a cuddly get-together of hedge fund managers, private equity managers and institutional investors.

How should we judge the value of conferences? Are they worth the registration, travel and accommodation costs, and the opportunity costs? The benefits of access to new ideas and new people are easy to overstate. As a newly minted naïve academic, I expected each conference presentation and each new person I met to reveal ultimate truths. Now my expectations are profoundly pragmatic and reflect the difficulty of creating, articulating, extracting and using ideas.

A one hour presentation or panel discussion is time well-spent if I can extract one new (to me) idea, or one fresh insight into an existing idea, or one notion that challenges a belief or bias. In the same spirit, meeting one person with different patterns of thought makes that time well-spent. To identify let alone to absorb a single new notion demands both a prepared mind and constant unrelenting attention, especially as the most challenging notions often spring unexpectedly and sporadically from unprepared off-the-cuff remarks. Yet in our age of distraction those addicted to iGadgets, constantly fixated on their screen, will likely miss the rare gem of insight, as will those listening to people while simultaneously searching the room for someone ‘better’. I asked an addict why he was glued to his iGadget through presentation after presentation. Paradoxically, his response, “because I might miss something”, ensures that he almost certainly will miss something.

And what might that ‘something’ be? It’s unlikely to be an implementable investment opportunity or something that will quickly make you smarter, richer or more attractive. More likely it will be singularly irritating, something that exposes your inadequacies and your lack of understanding.  The ‘something’ may be no more than a vague hint of an unlikely possibility.

One such arose during a discussion on the supposed failure of diversification due to the convergence of correlations - a consequence of massive institutional herding. One panellist stepped away from the safety of prepared well-understood remarks and speculated (how refreshing is that?) that, as Irving Fisher might have put it, correlations are reaching “a permanently high plateau”. Were that the case, we could reconsider the simplicity of a Capital Asset Pricing Model approach with but a single risky asset class (‘the market’) where an investor has a single decision - the weight in ‘the market’ and the (possibly negative) weight in cash. That’s an irritating notion to play with ... and inchoate thinking is indistinguishable from playing.

Economic system complexity defies influence and control

Another ‘something’ was thrown out by the OECD’s William White, an ex-governor of the Bank of Canada, who claimed that central bankers know not what they’re doing, a frank admission made not in a pejorative sense but more as a recognition that the system they try to influence and control may be beyond their influence and control. Because our models derive from misguided attempts to make economics ‘scientific’, central bankers’ implicit metaphor is an engineering control system like air conditioning, a stimulus and response system in which negative feedback mechanisms eventually result in stable dynamic equilibrium; a system where intelligent informed human turning-of-the-dials (think QE II) will eventually lead to desired outcomes.

But what if that metaphor fails because the system’s complexity undermines and defies influence and control?  White called for a quite different metaphor, one where the market is akin to an evolving, adapting imperfect biological organism, more like a forest or a coral reef or an English country garden where human involvement is a mixed blessing. One irritating question is whether that metaphor can be extended into a more explicit model, perhaps with practical insights? More irritating still: Is it true that complexity induces stability in ecological systems yet instability in financial systems?

At the conference there were hints of the tension recently exposed by the Nobel awards to Gene Fama, an economic positivist who showed the world to be flat and efficient, and Bob Shiller, a normative economist, who showed the world to be craggy and inefficient. No surprise that the positivists dominated a conference of hedge funds and their supporters. Nonetheless the belief that economics or finance is a value-free science driven by rational expectations was occasionally challenged. The Canadian banker made an explicit plea for economics to return to the principles of its founders - Smith, Bentham and Mill - as a humanist discipline. Barney Frank, the only left-wing, left-handed, gay, Jewish ex congressman, he of Dodd-Frank, was even more explicit in his call for more and better regulation and increased taxes. My similar appeal, part of a proposed solution to the underfunding of public sector pension plans, included the US adopting a simple tax-funded universal health care system, the effect of which would be to cut public pension liabilities by 45%.  Later I was told a bunch of gentlemen were waiting to see me dressed in white sheets and carrying a noose and burning crosses.

Fees can’t fall when we all believe we’re uniquely gifted

Most revealing were the responses to “why is there (almost) no variation in hedge fund fee levels.”  Hedgies instantly justified 2&20 (2% per annum management fee plus 20% performance fee) on the usual grounds of paying for talent, an attribute they all claim to have in abundance, a justification that for painfully obvious reasons, was strongly supported by their clients. The real answer was left unsaid. In an open free market with no informational asymmetry, competition should force prices down towards the marginal cost of production, as happens with index funds. By comparison, the market for hedge funds suffers from massive informational asymmetry in which the buyer cannot determine quality (nor in truth can the vendor.) In such markets, pricing uniformity should be expected as any lowering of price will be interpreted as a signal of low quality, just as it is for women’s haute fashion.

It’s not only the hedge funds that have an abundance of rare talent. Pension fund executives solemnly declared that they too have a ‘truly gifted and talented team’ and a ‘wonderful board’. Why is it beyond us to openly discuss our inadequacies and failures? Especially in the faux science of economics and finance, we can learn most from revealed inadequacies and failures.

 

Dr Jack Gray is a Director at the Paul Woolley Centre for Capital Market Dysfunctionality, Faculty of Business, University of Technology, Sydney, and was recently voted one of the Top 10 most influential academics in the world for institutional investing.

 

RELATED ARTICLES

Druckenmiller on the biggest mistake in the history of the Fed

banner

Most viewed in recent weeks

Pros and cons of Labor's home batteries scheme

Labor has announced a $2.3 billion Cheaper Home Batteries Program, aimed at slashing the cost of home batteries. The goal is to turbocharge battery uptake, though practical difficulties may prevent that happening.

Howard Marks: the investing game has changed

The famed investor says the rapid switch from globalisation to trade wars is the biggest upheaval in the investing environment since World War Two. And a new world requires a different investment approach.

Welcome to Firstlinks Edition 606 with weekend update

The boss of Australia’s fourth largest super fund by assets, UniSuper’s John Pearce, says Trump has declared an economic war and he’ll be reducing his US stock exposure over time. Should you follow suit?

  • 10 April 2025

4 ways to take advantage of the market turmoil

Every crisis throws up opportunities. Here are ideas to capitalise on this one, including ‘overbalancing’ your portfolio in stocks, buying heavily discounted LICs, and cherry picking bombed out sectors like oil and gas.

An enlightened dividend path

While many chase high yields, true investment power lies in companies that steadily grow dividends. This strategy, rooted in patience and discipline, quietly compounds wealth and anchors investors through market turbulence.

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

Latest Updates

Investment strategies

Getting rich vs staying rich

Strategies to get rich versus stay rich are markedly different. Here is a look at the five main ways to get rich, including through work, business, investing and luck, as well as those that preserve wealth.

Investment strategies

Does dividend investing make sense?

Dividend investing offers steady income and behavioral benefits, but its effectiveness depends on goals, market conditions, and fundamentals - especially in retirement, where it may limit full use of savings.

Economics

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

Strategy

Ageing in spurts

Fascinating initial studies suggest that while we age continuously in years, our bodies age, not at a uniform rate, but in spurts at around ages 44 and 60.

Interviews

Platinum's new international funds boss shifts gears

Portfolio Manager Ted Alexander outlines the changes that he's made to Platinum's International Fund portfolio since taking charge in March, while staying true to its contrarian, value-focused roots.

Investment strategies

Four ways to capitalise on a forgotten investing megatrend

The Trump administration has not killed the multi-decade investment opportunity in decarbonisation. These four industries in particular face a step-change in demand and could reward long-term investors.

Strategy

How the election polls got it so wrong

The recent federal election outcome has puzzled many, with Labor's significant win despite a modest primary vote share. Preference flows played a crucial role, highlighting the complexity of forecasting electoral results.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.