The Quest for Absolute Returns

Stanley Druckenmiller wisely claimed “It’s not whether you’re right or wrong, but how much money you make when you’re right and how much you lose when you’re wrong.” Essentially, how one attends and deals with losing positions in a portfolio will make the difference in the performance metrics that are derived and scrutinized by your current and prospective investors and clients.

The domain of traditional asset management is not short on performance metrics that heavily weight in the decision to hire, compensate, retain or dismiss portfolio managers. The use of these metrics such as Alpha (out-performance to reference index) and Information Ratio (excess returns per unit of excess risk assumed) have become core elements in the evaluation of portfolio managers as well as driving much of the portfolio construction and management processes. These core metrics have imposed a culture that rewards and prioritizes out-performance (being more-right or less-wrong than the market) over and above the objective of protecting the capital (avoiding being outright wrong).

The motivated professional portfolio manager is constantly seeking to score and deliver better performance metrics than a competing and competent peer group, and/or better than a referenced index. This objective drives the decision-making process and focus on playing offense rather than defense, to score rather than blocking, to beat the averages, and to out-perform. The professional portfolio manager is in constant pursuit of superior information and thus predisposing him/herself to behavioural biases that are incoherent with the protection of capital and the generation of absolute returns.