Asset Management must attach to a higher-normalization of evolutionary truth, i.e., nature, to produce improved repeatability of asset-class returns. Let me explain in this format the broad strokes of why and how.
I explain the specific implementation in our Asset Manager Masterclass.
First, asset managers have a new and incredible opportunity to affect and direct human evolution if they choose to grab it. In a world of depleting returns and increased pressure on fund performance, said choice becoming increasingly more of a fiduciary obligation.
For paraphrasing Albert Einstein’s wisdom, the thesis of finance (now in the U.S. eleven times the size of production) determines what humanity can discover. And a financial arbitrage can deploy the unique kind of benevolent dictatorship capable of picking and choosing what it, not a government, deems valuable. The inverse of the passive downside protection government, hamstrung by public consensus and sovereign borders, is relegated to deploy.
When our democracy’s excellence and government leaders leave a lot to be desired, asset managers can still easily chart their course and deploy asset allocation strategies in complete ignorance to said democracy. Good or bad.
The bad, as in past investment allocations to the tobacco industry, corner-cutting food companies, and gun-manufacturers directly responsible for the weakening human of renewal. Those lousy investment decisions over the last ten years or so now embarrassingly corrected by the cheap karma from a variety of ESG style programs, augmented by external rating firms like MSCI and others, seeking solace in sustainability.
In actuality, sustainability is an evolutionary oxymoron and does not exist in an ever-expanding universe with ever-dissipating energy. Thus any program hinging on its supposition is bound to fail in the long run.
So, here we go again, with new manmade conjecture incompatible with evolution rapidly adopted by 42% of institutional funds and easily knocked down by the most fundamental observations of cosmology, physics, and biology. Expect returns to demonstrate such incompatibility when the honeymoon of naiveté is over.
American theoretical physicist and Nobel-prize winner Richard Feynman described the fragility of our understanding of nature best:
Science is the belief in the ignorance of expertsRichard Feynman
Even after Feynman’s amazing discoveries of quantum mechanics, quantum electrodynamics, and particle physics, he humbly referred to those as merely better approximations of how nature works, with, as he openly admitted, much remaining unknown. Precisely such kind of intellectual honesty, of challenging human assumptions, presumptions, and foregone conclusions, is what leads us to a better understanding of nature’s truths we are ultimately subjugated to.
Therefore, the role of asset management is not just to produce returns within a period of 15-years, but to produce perpetual returns of long from the consistent exploration and inspiration of human discovery, ingenuity, and capacity. The reason why I spent so much time understanding and discovering the principles of evolution responsible for our evolutionary excellence.
The accuracy of our theory of human evolution, to reiterate Einstein, is responsible for the characteristics of returns that can be discovered. With the guaranteed renewal of human ingenuity and capacity directly correlated to the consistency of repeatable returns asset managers on a scale of long can depend — the strength of human renewal leading to the consistency of repeatable returns.
Asset management must unshackle from the current musical-chair dance of risk escapism focused on the distribution of downside risk and instead attach to a higher normalization of truth to drive returns at the fringe of an ever-expanding fractal of human evolution, upside risk.
Economics has been the theory asset managers currently lean on the most in their asset allocation strategy. Economics is the pseudo-science I debunk entirely for its inability to trace or predict human performance.
For economics is a rebel without a cause, the regurgitation of hindsight aimlessly extrapolated to a supposition of foresight expected to break the norm, an implausible feat. Its grave depravity of reason is exacerbated by a systemic confounding of consequence and cause (Nietzsche), in-turn even making practical relevance and mathematical symmetry fall apart entirely.
How can a theory of economics be taken seriously in tracing human performance when it does not even incorporate or obey any foundational principles of human evolution? Is the rhetorical question I pose to the generally deaf ears of the disciplines of economics?
In the words of Feynman:
I would rather have questions that can’t be answered than answers that can’t be questionedRichard Feynman
Ergo, it is better not to have answers than to submit to the answers of economics we know to be false.
Lost in Consequence
If not for the unquestionable manmade dogmas mentioned above, lack-luster returns (7% over 15 years across all fund allocations) in asset management are met with an array of downstream suboptimizations of a now well-socialized, err colluded, fabricated truth solidified with the help of the ILPA. An organization that must do better than establish dining-room etiquette of finance or act as the trash collector of evolutionary incompatible “best practices.”
The grave manmade depravity of reason in asset management stemming from another grandiose confounding of cause and consequence and reaching its crescendo when reducing general partner fees is suggested as the most viable strategy to improve performance. Ignoring blissfully how a general partner without the ability to spot outlier values will not suddenly see the light of day when his pay diminishes. A fallacy equal to suggesting an apathetic waiter in a restaurant will perform better after you tip him less. Or, inversely, getting the keys to a Ferrari will automatically make you a better driver. Money does not inherit merit.
Causal change is needed to yield new standards of desirable consequences capable of securing repeatable returns consistently.
Passive to Active
The beauty of a higher normalization and more accurate theory of human evolution is that we can now turn asset management strategies from the regurgitation of hindsight and me-too allocations into a proactive approach with the decisive foresight from what is to what must be.
A proactive strategy that breeds more consistent fund performance and enhances the continuity of (member) contributions to the fund. With a 360-degree plan by which the public is no longer deceived with evolutionary snake-oil or treated as the last in a chain of greater-fools with their savings merely used to widen and prolong the slipstream of asset commoditization.
Asset managers, if they lay down the theory that determines what can be discovered, now have the opportunity to define what returns must be expected from exploring the fringe of human capacity and renewal, with a risk profile attached to a more relevant macroeconomic viewpoint of the world, less sensitive to microeconomic volatility, and more in tune with the evolution of our evolution.
Asset managers must subsequently embrace money-managers to meet fund objectives with private placement memorandums subscribing to the new asset management playbook.
New yet Proven
The only way for asset management to yield consistent returns derived from the expanding fractal of human ingenuity and capacity is to subjugate the asset management theory to the theory of human evolution. Less conflict and more support for our dynamic equilibrium with nature – we depend on for survival – will boost human excellence and renewal to prime the pump of repeatable returns in asset management perpetually.
Thankfully, some 4.5 billion years of evolution (some 13 billion years in our universe) reveals some valuable principles we must take to heart. A higher normalization of truth derived from our most recent observations of nature yields not only principles never applied but also invalidates many structures we have implemented to date.
In summary: our convoluted manmade fabrications hinging on stifling monisms of hindsight must change to dynamic systems with a forward-looking trajectory to inspire and reap the rewards of a brave new world with the constant renewal of the fractal of human foresight deployed to realize the repeatability of returns.
A brave new world in which finance is detached from the diminishing socioeconomic value of itself and instead becomes attached to a new normalization of evolutionary strengthening, attached to production, to trace and reap the rewards from the continual expansion of the fractal of human discovery.
Three Key Steps
So, to align asset management with the continual expansion of human evolution, we must, in a nutshell:
- Align the asset management theory to a higher normalization of evolutionary truth (as described above)
- Decouple asset risk from distribution, and establish risk-return profiles (as highlighted in re-risk asset management)
- Remove and flatten embedded bottom-heavy diversification of risk (as highlighted in re-risk asset management)
Only with a plan that provides 360-degree evolutionary integrity to the public, with
- the public as the perpetual contributor to public funds,
- the public strengthened by the products produced by the investible asset, and
- the public as the direct beneficiary of upside,
can we expect the renewal of value to generate the consistency of asset-class returns. Failing one of the above will induce nothing short of an anthropogenic cascade, with the arbitrage of finance directly responsible for humanitarian regression.
The opportunities and responsibilities for asset management are awesome, serious, and imminent. With the proper alignment of our evolutionary wherewithal, asset managers can play a crucial role in developing the human race. But only when asset management diverges from the regurgitation of hindsight and begins to point their assets towards the evergreen horizon of the expanding fringe of human excellence.