Performance Doesn’t Tell the Whole Story

Abstract

Given how convenient it is to do so, Oyster indicates that many investors rely too heavily on past performance to determine whether a fund manager is skillful and likely to repeat strong returns, or was just lucky. But past performance provides little insight into that question because most funds experience both great and terrible performance at one point or another. Oyster shows a statistical means of illustrating how an investment manager may outperform simply by randomness. He also points out changes over time that further inhibit researchers’ ability to differentiate skill from luck. Changes such as personnel turnover, sizeable increases or decreases in assets under management, philosophical changes, and others all cloud the picture when attempting to parse skill from luck in investment management.