Just an interesting thought experiment: 2 fellows call you on the phone to offer their services as money managers for your fund of funds or pension fund. They would like to meet with you as they are only down 20% in 2008 and are soliciting investors.
One of these guys is rumored to have lived in an open marriage for years and the other one trained originally as a weather man before becoming a lawyer. He described himself once as a book with legs and loves esoteric facts about human psychology.
Neither manager has completed a bulge bracket bank training program but the one fellow has an MBA from a prestigious program even though he ran a gas station he owned into bankruptcy.
They indicate they have an +8 year track record and are only 16% riskier than the stock market (S&P 500) as measured by standard deviation and have returned 7% per year over the last 8 years.
They charge no fees and have a Sharpe ratio of 0.21 over the last 8 years. Both say they haven't ever calculated a beta and think all of modern finance is a joke.
Would you meet with them? Would you give them money?
First consider your answer and then peek at their "fund".
Here is the data Download data.xls for the quants in the crowd. I only went back 8 years to give a feeling of what it must be like for "experienced" managers these days.
The track record actually stretches quite a bit farther of course, but I wanted to provide an example of the limits of numerical data and recent performance biases when judging manager's skills.