Guest Post: Winning Gold in Trading and Investment

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It wasn’t long ago that the British Olympic team (Team GB) was a firm “also ran” when it came to bringing home medals. At the Rio Olympics, however, they were remarkably successful, thanks largely to a concerted focus on the performance development of British sports talent. What lessons are there for the trading and investment industry from this intense focus on performance?

One of the outstanding stories to emerge from the Rio Olympics has been the success of the British team.

Team GB finished second in the medals table, amassing 27 golds and 67 medals in total, a higher medal count than when they were Olympic hosts four years earlier, and beaten only by the US, which has a population over five times larger.

Britain hasn’t always been able to boast such impressive performance. Just 20 years earlier, at the Atlanta Olympics, the UK claimed just one gold medal, finishing a lowly 36th in the medals table, with 16 medals in total.

This transformation in performance outcomes will doubtless become a case study for aspiring Olympic nations. For UK sport, it has been a journey characterised by a deliberate focus on the process required to deliver athletic excellence.

Focusing on process is the key to optimising outcomes in any skilled activity, be it physical like sport or cerebral, like trading or professional investment.

Great performance in trading and investment management is as much mental as it is intellectual, and arguably more so. After all, as Warren Buffett said, ‘Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ… Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.’

Behavioural attributes, such as mindset, mental strength, emotional control and focus are just some of the many qualities required for success in trading and professional investing – and these qualities are shared by elite athletes.

And, whereas all Olympic athletes have coaches to help develop these attributes, so in risk businesses such as asset management, coaching can be used to help strengthen and fine-tune investors’ risk skills and behavioural risk capabilities – what we term ‘risk intelligence’.

Historically, this hasn’t been a focus area for the fund management industry. The induction processes and specialist training courses run by most investment firms focus on technical subjects, with little, if any, focus on improving the behavioural aspects of ‘risk performance’. This kind of learning and development has been, and remains, mostly experiential.

In a sense, this echoes how sport worked prior to what is known as the ‘Performance Revolution’.

The Performance Revolution can be traced back to the mid-1980’s, when individuals, teams and countries started to adopt new practices and methods of developing their talent. By the mid 1990’s, this revolution had taken a hold with the growth of advanced training facilities that employed new technologies and incorporated the rapid advances that had been seen in physiotherapy, sports medicine and sports psychology.

At the same time, coaching moved on from the guy with a tracksuit and whistle shouting motivational phrases, to being a highly integrative and professional activity that encompassed all stages of an athlete’s development and performance. Included in this, was a new focus on using data (as seen in “Moneyball”) to strengthen recruitment and athlete training processes. The closer an athlete or team was to the top of their sport, the more they engaged with a whole team of coaches and data analysts to help gain the vital, often marginal, edge which translated to a huge competitive advantage.

Britain was late to this game. The spirit of the plucky amateur, putting in long hours of training, overseen by a general coach who worked with a stable of athletes was still very much the attitude in the UK of the mid-1990s. Fast forward 20 years, and Britain has made a huge investment in top quality training facilities, high level performance coaching, and in-depth use of powerful analytical processes – all of which has paid off in an a quite astonishing way.

In many ways, the trading and fund management industries, and the broader financial risk industry in general, are at a similar point to where sport was prior to the Performance Revolution.

Just as there were great sportspeople before that watershed point, so there are great fund managers and traders today. However, the early adopters of new practices in sport gained a huge competitive advantage over their rivals. Now the same is starting to happen amongst professional traders and investors: early adopters of new practices in both data analytics, neuroscience and risk psychology, supported by high quality coaching at the individual and team level, are realising measurable alpha gains, and trying to keep it quiet.

How big is this competitive advantage? Essentia Analytics, which provides performance data analysis services to investment professionals, has shown that it can help fund managers make an additional 50bps of alpha in a given year by mitigating behavioural bias. The probability of achieving those results year in and year out is then enhanced by professional coaching.

Ultimately, the prize is consistent and sustained superior returns, more regular appearances toward the top of performance tables, and fund inflows.

One of the few pieces of research which highlights the potential from focusing on the human aspects of performance, was published by Citi Prime Finance in 2013. Citi looked at the effect of different human capital management practices within hedge funds over a three year period. They found that those firms that had a superior approach to supporting and developing their human capital outperformed rival firms that were less proactive in these areas by an average of almost 200 bp per year. That is a staggering difference, and is consistent with what I have witnessed as a risk performance coach.

The improvements in performance I myself as a coach have seen amongst traders, investment professionals and teams I work with, have often been worth hundreds, and sometimes thousands of time the value of their initial investment in the coaching.

By way of an example: Just last week I was informed that a trader I coached back in 2014, has for the second year running more than doubled his performance run-rate over previous years. His two years performance has now produced additional revenue of more than $3.5mio compared to his previous long-run average performance level. To the bank that employs him, for this individual alone, this is a return worth almost 600 times the initial investment in his coaching.

So what is stopping financial market firms and their managers from joining the Performance Revolution as it takes hold in the trading and investment industry?

New practices require out-of-the-box thinkers to lead the charge, as Billy Beane did in “Moneyball”. Status Quo bias, which leads us all to resist change, is a powerful force. Yet forces of technological disruption and increased regulation are forcing change to happen in this industry whether we like it or not.

As British athletics figured out belatedly, their leading sportsmen and women had huge untapped potential which could be realised with a more scientific approach to human capital management. The same opportunity exists for the investment management industry today.

By adopting an advanced performance improvement approach, which utilises performance data analysis in conjunction with coaching, the most innovative thinkers in asset management can propel themselves and their firms significantly ahead of the competition.

About the Author

Steven Goldstein is Managing Director at Alpha R Cubed, and work with banks, hedge funds and investment management firms to help them improve their people’s capabilities and performance. To know more about Alpha R Cubed, visit the website www.alpharcubed.com or email Steven at steven.goldstein@alpharcubed.com. Follow Steven directly on Twitter. Also visit the ‘Behavioural Trading’ blog for more articles and to sign up for the ‘Behavioural Trading’ newsletter

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