Lots of fund managers have gone full circle in the last 5 years and are now back at benchmark or worse returns. Imagine how many millions were extracted in fees and performance fees on the way up, for those ultimately average returns.

I’m currently reading through many of the quarterly financial updates and this is a recurring theme. It’s tricky, whether you are you are trying to pick a Fund manager to invest with or just looking to identify who to follow for stock ideas. People usually go straight to the track record, which unfortunately can be very misleading. There is almost never enough data to deduce the skill with a high degree of certainty, even 5 years. For example, take a long only fund manager that perhaps makes 20 buy and sell decisions in a year. If you want to get a feel for the variance (luck) that accompanies this, start simulating coin flips in groups of 20, then sit back and watch the wild swings the results will go on. If you are going to look at track record then you really need to dig deeper into how they achieve those results and what levels of risk they took.

If even a 5year track record can be misleading, what can you do? Well of course you could go longer but then you stumble across a whole range of new problems. First off, are the same people managing the fund, you are looking at the people not the brand. A manager with a good 10 year history, is likely managing many times more than the amount they achieve those results with. A track record built on small FUM of sub 100m in most cases is unlikely to be repeated if they now have 1bn. Also in the early days they are usually extremely passionate, driven and looking to make a name for themselves. Once the business grows larger their incentive to take risk diminishes as does the likelihood of alpha.

IMO, It's as much art as it is science. I look at track records of course, but I am more interested in finding the next good track record before it happens. 

-Read and think about what they are writing and saying.

-Look at what other smart investors and their peers (not their mates) think of their annalysis.

-Look for pockets of honesty and integrity that you wouldn’t always expect to see from a manager.

-Check that their strategy is in an area of the market where you could reasonably expect them to have an edge.

-Make sure they have plenty, if not all their skin in the game.