In-Depth

Swagger : Alpha

A Swiss bank account? A house in Nantucket? A Rolex watch? These managers may have all the swagger, but how much alpha can they deliver?

“Patrón and soda, please… No Patrón?” The Canadian pension executive, persuaded by the late hour, settled for Herradura Silver. Among the ragtag crowd at the least ambitious bar in a very ambitious neighborhood—New York City’s West Village—he’d be tops in swagger. If there was a nicer tie than his in the room, it had long since been pulled off and stuffed into a jacket pocket. Over the consolation tequila, he began to explain a theory he’d been harboring to the two rapt young women drinking cocktails on either side.

“Asset managers’ swagger-to-alpha ratio, in my experience, is a pretty strong indicator of whether or not they’re worth hiring,” he said. “The higher the aggregate ratio, the more wary I become.” Though it’s tough to picture this asset owner saying the phrase aloud—Canadian pension, remember?—the term Michael Lewis revealed in Liar’s Poker for rainmakers at Salomon Brothers sums up the type: Big Swinging Dicks. In gentlemen’s terms, swagger is a posture of superiority. According to the asset owner, who has been in the game long enough to see plenty of it, it’s a disdain for those lesser beings with the nerve to play at the same profession.

Like any good financier, he can quantify the metric. An asset manager has a Swiss bank account? Two swagger points. Does he (and it’s nearly always a “he”) own a vacation home on an island? One point, plus a bonus if it’s Martha’s Vineyard, a Hampton, or Nantucket. Five points for St.-Tropez. Employees of Goldman Sachs earn two points, or one each for funds named after dark colors, geological matter, or Greek letters. “Do you donate more money every year to your kid’s private school than you pay in tuition—because otherwise they’d never get in? Swagger. Does your sports car have more suede in the interior than leather? Right again.” Designer neckwear earns one point, but Rolexes, apparently, are poor indicators. He sighed. “I’ve thought about it, but everyone seems to have a big ugly watch.” The trappings of swagger seemed less off-putting to his companions.

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For asset owners, the trouble with swagger isn’t that it makes manager visits unpleasant—although it does—but that it’s correlated with unreliable alpha. A senior managing director may not have picked worthwhile investments in years, but he certainly knows how to pick the inputs that keep his track record shining. “The archetype of a high-ratio manager would be the guy who made some stellar bets early in his career and has been coasting on them since then. He beats up on the junior analysts and dismisses information that doesn’t support his thesis,” the allocator lamented. “It’s that age-old stance: ‘Research came up with all the losers, and I, the precious portfolio manager, came up with all the winners.’” Time for another drink—Patrón be damned.

This was no jealous rant. Institutional investors north of the 49th parallel don’t face the same paradox as their American counterparts: The larger the checks you get to sign, the smaller the ones you take home. This asset owner, as his top-shelf habit and fancy tie suggest, has the means to rival his managers in swagger points, but not the temperament for it.

“Low swagger-to-alpha investors are, to me, inspirational,” he said, eager to balance the Wolf of Wall Street side of the discussion. “It’s not that they don’t have emotion. What they care for is the quality of their work and the treatment of their clients’ assets. Prolonged, consistent, and meaningful alpha is rare—it can speak for itself just fine. Luck always plays a role, and this group is quick to give credit to their analysts and partners, claim some luck, and remind themselves of their tougher years. And we all need a little inspiration now and then, reminders that however great our success may feel, our results are the combination of an amazing number of inputs and actions, many of them—maybe most—beyond our control. We are never as good as our best numbers, just as we’re never as bad as our worst.”

“Asset managers’ swagger-to-alpha ratio, in my experience, is a pretty strong indicator of whether or not they’re worth hiring. The higher the aggregate ratio, the more wary I become.”

In a freezing cold office in Japan, he found the lowest swagger-to-alpha managers he’s yet come across. This small clutch of older British men lived the philosophy that great performance speaks for itself. Indeed, according to the asset owner, they hardly acknowledged the presence of some of the world’s largest allocators in their darkened building. “It was after the Fukushima meltdown, so power was scarce. They had bicycle helmets stacked in the corner of the conference room and wore these threadbare tweedy jackets. I’m not sure they were using a lot of toothpaste. It looked like we were the first potential clients they’d seen in about a decade. But they didn’t pay too much attention to us—we were more like an oddity. That’s real money management.”

Before midnight, with the ratio of bleary-eyed to sober-ish patrons hitting about 10:1, the asset owner departed, still crisp in his Ermenegildo Zegna silk tie. (One point.)

Leanna Orr