Spot the skill
One of these nine is a real expert.
Nine fund managers, five years of results each. One has a genuine edge, as good as a top fund. The other eight are flipping coins. Tap the expert.
Each chart is five years of results, all on the same scale. The number is the total gain or loss.
Why your eye can't do it
The expert here has a Sharpe ratio of 0.5 a year. That is a fund most investors would be glad to own. But over five years, the noise in each chart is bigger than the edge. Eight coin-flippers give luck eight chances to beat one real skill.
This is not a cartoon
In 2010 Hasanhodzic, Lo and Viola ran a "financial Turing test". People could tell real market prices from shuffled ones, when they got feedback. That is a different job. Telling a skilled manager from lucky ones means finding a small push hidden under a big wobble, and no eye is good at that. Only years of results, or knowing how many managers were in the room, can do it.
Before you trust a track record, ask: how many others were there?
Sources
- Hasanhodzic, Lo and Viola, "Is It Real, or Is It Randomized?: A Financial Turing Test", arXiv 1002.4592 (2010).
- The charts are random daily returns made fresh in your browser. The expert gets a daily push worth a Sharpe ratio of 0.5 a year; the others get exactly zero. The chance figures come from the normal formula for the best of nine.