One Swallow Does Not A Summer Make
2/15/22 | Eric Alexander
Scholars disagree about the genesis of the classic proverb.
Was it Erasmus who said:
"It is not one swalowe that bryngeth in somer. It is not one good qualitie that maketh a man good."
Or was it Aristotle, who said:
"One swallow does not a summer make, nor one fine day; similarly one day or brief time of happiness does not make a person entirely happy."
Either way, there is a lot worth considering by Quants who are feeling some warm sunshine on their faces after a long, cold, dark winter.
They must agree with the sentiment that one good run does not a summer make and should not be giddy about recent performance. There is simply not enough there and not long enough a run for any Quant to be entirely happy.
Yet the more important lesson may come from Erasmus. He reminds us that, just as clients grew tired of waiting for an explanation for years of poor performance, they are now rightfully expecting a thorough and credible analysis of the upturn.
And what better time to share the underpinnings of your future success than during a period of strong performance. You have their attention. But, you will have to do better than, "We told you things would come around." Claiming now that you were right all along and that you knew your strategy would prevail when the market regained its senses is almost a promise to inexplicably underperform again in the future.
Perhaps this is the time to shift from trying to win an argument to engaging in an open dialogue about new ideas and an acceptance of why old ones may no longer apply. This can begin with a deep dive into the fundamental assumptions and cultural drivers behind the construction of your models and a refocusing on intermediate time horizons, as opposed to harder-to-quantify long and short-term perspectives.
After all, what your clients really want to know is which period of performance is the anomaly. Were the years from 2018-2020 an unfortunate aberration that temporarily derailed a reliable strategy, or does this uptick just represent a chance for investors to recoup some losses at an advantageous exit point?
Either way, they will be watching closely to see if you are better prepared to manage your models and your messaging in the next downturn. They may expect a more dynamic approach to adapting your models to new market modalities and greater candor and transparency in your explanations. Reversion to the mean may not be an entirely persuasive explanation.
That's why it is so important to hone both your messaging and models now, while the sun is shining, and ahead of any further attrition. This is the time to press even harder on understanding what elements of your model are the true drivers of performance in both the long-term and medium term. And it is certainly the time to come clean on what client's should reasonably expect going forward. If you are not able to explain why performance should remain positive in the upcoming medium term, or why it should succeed in multiple environments, then you may be better served by more effectively managing expectations and heading off disappointment.
It is essential that managers explore and find answers to these issues, and share the findings with their clients, in a strong, proactive way that rebuilds both performance and relationships. They must dig deeper in areas of under and over performance and effectively communicate objectives/enhancements with internal and external distribution teams.
Understanding your client’s perspective of your past performance and respecting their concerns -- not prematurely blowing your horn -- is the right way to manage a dialog today. After all, one “performance swallow” does not a credible track record make
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