Thoughts, comments, and reassessments of recent columns.
Relatively Right, Absolutely Wrong?
Nobody but Rekenthaler thinks that mutual fund managers have enough skin in the game, to use the terminology of Nassim Taleb. The most successful counters to my claim were those that emphasized the importance of absolute performance. Writes one reader (who wishes to remain anonymous):
"As you correctly argue, fund managers are concerned about relative performance and do things to minimize the chance that bad relative numbers will threaten their livelihood. But … that's not nearly enough to discourage them from engaging in the kind of stupidity that puts capital and, in extreme cases like the financial crisis, the system at risk. So, if you had something that put managers on the hook in absolute terms, then and only then would they really have skin in the game. Managers have it pretty easy, this attracts them to the business, they fall into line (herd, essentially) with the indexes acting as a sort of organizing principle, and this creates systemic risks, the costs of which are borne by society as a whole."