Lesson 10: Size matters. Though one needs $350m to breakeven in a hedge fund these days, the temptation to get very big is high. Size leads to non-linearly scaling trading costs and huge liquidity footprints. They found that most good managers can deliver strong alpha up to $1bn of capital, very few can do so persistently above $3bn.
Lesson 10 1/2: Most fund management careers end in failure. This relates mainly to character. On the one hand there is dealing with downside – it is very hard to be wrong even 45% of the time. Decision making freezes up.
On the other is hubris. Ancient Rome had a good approach to hubris. A winning general would be given a huge parade on his return. At the end of it the general would ride in a chariot to the centre of Rome. In his chariot he would be accompanied by an ‘Auriga’ (a slave with gladiator status) who would whisper in the general’s ear – “memento Mori”, remember you are mortal.
