Someone who allocates money to different hedge fund managers is similar to a basketball coach — you have to know how to pick the great players.
North Carolina-based fund manager Mark Yusko said in a recent Real Vision Television interview that he learned this after a conversation with Coach K, the legendary Duke basketball coach.
“I got to meet [Coach K] ….and he had this great line — ‘Our businesses are kind of the same,'” Yusko, who runs $3.7 billion Morgan Creek Capital Management in Chapel Hill, told Real Vision.
Michael Krzyzewski has headed the basketball program at Duke University since 1980, and the US senior team since 2006. He has won the NCAA championship on five occasions, and won over 1,000 games over the course of his career.
Yusko recalled Coach K explaining to him: “You never take a shot, I never take a shot. You try to pick the best managers. I try to pick the best players.”
“Then he says, ‘You know what separates the great players from the average player? The average player always focuses on the last play. The great player always focuses on the next play. An average player misses a shot, OK, goes down and commits a stupid foul. A great player misses a shot, total erasure, then goes down and steals the ball and makes a layup.”
That analogy perfectly sums up investing.
“The average investor wants to double down on the loss,” said Yusko. “He wants to prove to everyone he’s right. You’re not right. Get out.”
The great investor, on the other hand, knows how to quickly acknowledge their mistakes and move on.
This week, at the Absolute Return Symposium in New York, Yusko pointed out that the hedge fund industry is made up of 10,000-plus funds, but they aren’t all good. He said there probably aren’t even 1,000 good hedge funds. There may just be a few hundred.
“There’s a very small number that has the talent to generate superior alpha.”
When deciding to allocate money to hedge funds, Yusko likes to avoid folks who are arrogant and can’t admit that they’re wrong.
“People with arrogance will crush you every time,” Yusko said. “Because in this business, if you’re a legend, right — if you are George Soros, Michael Steinhardt, Julian Robertson — you’re right 58% of the time. If you’re a legend.”
To Yusko, humility and self-knowledge are really important attributes for a fund manager to possess.
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