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Does investment skill exist and, if so, how valuable are track records in measuring it? These are perennial questions in the investment industry, where in reality, a track record of outperformance can be the result of sustained investment skill, or the result of blind luck.

Track records are poor guides for the future

Research papers and industry insights have consistently shown that track records are poor guides to the future performance of investment strategies. They offer little insight into the analysis of fund managers investment behaviour and are therefore imperfect in helping asset owners perform effective portfolio manager analysis. We strongly believe that looking beyond track records and working to understand the investment behaviour that drive track records can offer far more insight.

Measuring Hit Rates & Win/Loss Ratios

Our research used the Inalytics Peer Group database, which in this study contained over 215 long only equity portfolios and comprised around US$152bn of investment data by value. We focused our research on investigating how two key concepts – the Hit Rate and Win/Loss Ratio – can help inform how a fund manager generates alpha, and whether their track record can be relied upon as a useful indicator of investment skill.

 

Download the full research paper below or view our Research Paper 10: Track records luck or skill? to learn more about why track records are poor indicators of investment skill.

Contact us for further information on how Inalytics can help to improve your investment process and select skilful investment managers.

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