Hey Grob, thanks for your input.
The equity chart is amazing when you look at it on the surface level. Not many can say they can provide such a linear and near-optimized ride for their clients.
Digging deeper, we can look at his annualized return and maximum drawdown; 26.24%, and 29.08% respectively. Not awe-inspiring numbers by themselves, but these numbers would indicate that sheer consistency of which Eckhardt's run the money is what has achieved this smooth curve.
We can dig a little deeper now and look at how this curve was actually achieved. If we look at the yearly returns, we will in fact notice that his first decade of trading brought him most of this. Having a blast-off start and kind of petering down would be how I would describe it. Personally I think that the cumulative return chart can be misleading, since it starts off with a small number, 0%, and any increasing % is indeed compounded. As such, emphasis is put on high early returns to achieve a large percent gain. Looking at recent performance, his returns have been hit and miss... with some years failing to beat even risk-free rate. I do not know if this is due to a change in risk tolerance or change in strategy or possibly both. Would I invest with him today? Without understanding the reason for such performance dip, probably not.
The little red graph there, on the bottom, I assume is the S&P 500 Index returns. I would agree that comparing the two are like apples to oranges, but investors like to see some sort of 'relative return' comparison. I would argue that as a hedge fund, your responsibility is for 'ABSOLUTE RETURN', regardless of market conditions. I feel that many fund managers today have forgotten the 'hedge' part of fund. Many funds are just leveraged directional bets, without proper compensation for risk. With the insane amount of hedge funds out there, it is a good thing that survivorship is a factor. On the other hand, unfortunately a side effect of this type of behavior, investors and institutions, FOF, are more finnicky than ever and the propensity of them pulling their money is much greater, particularly at the most inopportune moment - re: drawdown. As a result, many funds that might have otherwise been successful are forced to close prematurely.
But I digress. Comparing yourself to any index would defeat this purpose of ABSOLUTE RETURN. However, to compare similar funds, many often compare fund performance vs the strategy-index performance, such as a long-short hedgefund and a long-short index.
As for paragraph 5:
I agree with your thoughts here. They are better articulated than my earlier posting about the academic view of 'right and wrong' and 'fully accepting or rejecting' a concept. In the scientific and academic world, one has to isolate variables for study in order to create the 'right' answer, but in the financial world, such blind focus can often lead one to miss opportunities.
You summed it up quite nicely:
Eckhardt took the steps and was saddled with the results he has to show for it.
I think you bring up a good point about a scenario with formal and informal training. We can use Eckhardt as an example of one who has had formal training. Hypothetically, an informally trained person would focus on
what works or what is practical instead of
what things should be. They would likely see the market in more open eyes and how it actually is, than to skew or bias their perception by only focusing on one aspect. At the same time, though, we must look at the cons: namely that an informally trained person might be more likely '
fooled by randomness' because they may draw spurrious assumptions and conclusions from their results or the results of others. The lack of formal training may also lead to many inconsistent results, since the person may or may not understand what is going on in the big picture. As a result, it is important to understand the tools one uses as well as the results of the outcomes. Keeping an open mind certainly helps.
Which brings us to your final thoughts:
It looks like to me that people who are improving what they do, spend their time getting tools, extensions of themsleves, built for only about three or four purposes: monitoring, analysis, decision making and taking timely action.
Its probably time, on ET, to begin to present what these tools can be; why they came to be; what their true purposes are and how they produce improved results.
You can see the four purposes of tools with Eckhardt; you can also see how the invented tools of Eckhardt have the many sides mentioned above, all subject to the constraint he chose to not do qual nor consider more than one variable.
Whats next?
I commend you for promoting this ongoing exploration and discussion with new challenges. Not many here have done so. I am still in the early exploration/learning stages, as my views on these topics must reflect, but I would be glad to discuss how I am going about things. Hopefully others will contribute meaningfully as well. I would also turn the question back to you to see your thoughts on the matter. I think that would be best reserved for a new thread though. I wanted to keep this particular thread focussed on Eckhardt's reasoning and strategies.
