Warren Buffett would not get a job with a hedge fund today, according to Sir Paul Marshall, co-founder of Marshall Wace, one of the most successful alternative investment powerhouses.
Sir Paul, 60, is musing on what makes a good fund manager, and the Sage of Omaha, who is lauded by many as the greatest stockpicker of all time, does not quite make the grade.
His Sharpe ratio is only about 0.7. “Well, 0.7 wouldn’t get you into Marshall Wace or any of the top hedge funds.”
The Sharpe ratio is a measure of a fund manager’s returns adjusted for the amount of risk they are taking. Most of Sir Paul’s team at Marshall Wace are on 1.5 or better.
He admires Mr Buffett, he says, but not that much, and says that his success is largely down to two factors: always backing Wall Street and using the float in his insurance company investments to leverage his investments.
Tsk, this was explained 7 years ago at Forbes.
That’s one form of leverage that Buffett has used. The other is that he went and bought an insurance company or three in the first place. He made good money as an investor first, yes, he very much did. Which he then used to purchase his way into the insurance business. He then applied his investment technique, as the Economist describes it, to the much larger investment funds that the insurance company controlled. Those funds being a good multiple of the funds that it had cost to purchase the company.
Imagine, just as a made up numerical example, that Buffett outperformed the market every single year by 1%. Another made up number, he started with $1 million. He’s going to, over the decades, make himself a very rich man that way. But look at it this way: if he uses the $1 million to purchase control of an insurance company with $10 million to invest, then he gets that 1% outperformance on that $10 million, then he’s going to be making himself richer ten times faster than by not leveraging up by buying the insurance company. For of course the outperformance in the investments flows to those who own the insurance company.