Monday, July 22, 2013

The Edge in Cycling and Money Management

The Edge in Cycling and Money Management

Lance Armstrong “won” the Tour de France seven times consecutively.  His cycling exploits, especially in the Pyrenees and Alps, were the stuff of legend, especially after his battle with cancer.    I’ll never forget “the look” he gave his chief rival Jan Ulrich as he powered by him on the assent of L’Alp-d’Huez in 2001.  However, his achievements were so extraordinary that many wondered if his efforts weren’t aided by performance-enhancing drugs.  Over the years, the anti-doping authorities tested Mr. Armstrong repeatedly, and his results were always negative.  However, whispers and rumors accompanied Mr. Armstrong’s achievements, and the former champion vehemently denied the charges and viciously attacked his accusers.

Scattered Meetings (2008)

Steven A. Cohen, the founder and chief investment officer of SAC, developed an outstanding investment record in the 1990s as a hedge fund manager.  His exploits enabled him to gather billion of dollars in assets and amass a vast personal fortune. Just like Mr. Armstrong, Mr. Cohen fended off hints and allegations that he’d used improper means in order to achieve his stellar record.  Even as those around Mssrs. Armstrong and Cohen were caught in improper acts, both men continued to protest their innocence.

In Lance Armstrong’s case, the whole sordid affair came out last year.  It turns out that Mr. Armstrong not only doped; he also carefully orchestrated the doping regimen for his team.  At this juncture, we don’t have the complete story about Steven A. Cohen.  While many around him have been convicted and his firm reached a settlement with the SEC, he has yet to be found personally responsible for any transgression.  However, Mr. Cohen’s day of reckoning may be coming closer.  Last week, the SEC charged Mr. Cohen with failing to supervise his investment employees.[1]  While the SEC doesn’t appear to have developed evidence to show that Mr. Cohen engaged in insider trading, the agency thinks it has the evidence to show that Mr. Cohen did not properly oversee those accused or convicted of insider trading.  We’ll see how the SEC’s case proceeds, but the agency’s complaint suggests that Mr. Cohen will have difficulty fighting off this charge. 

The worlds of cycling and money management share a common characteristic that beckons cheaters.  In both endeavors, the margin between success and failure is tiny, and the rewards of success are huge.  The small group of elite riders vying for the yellow jersey are seeking a small edge that will give them the power and endurance to outride their competitors on the steepest climbs.  Obviously, there are all sorts of legal means to this end, including rigorous training programs and detailed planning.  The best riders vigorously pursue all the legal avenues.  As Mr. Armstrong, his rival Mr. Ulrich, and dozens of other elite cyclists have shown, there’s an overwhelming urge to gain an insurmountable edge through illegal means.

In money management, the search for an edge is equally challenging.   In highly efficient markets populated by extremely motivated money managers, any advantage tends to disappear quickly.  As soon as one manager develops a model or a source of information that generates outstanding performance, the other managers will imitate the technique and thereby eliminate the edge. As a result, there’s a huge temptation to cheat, especially in a business in which winning leads to fabulous levels of wealth.  The SEC and USADA agency have equally daunting tasks.  No sooner have they unearthed or prosecuted a transgressor then someone finds a new way to deceive the financial or anti-doping authorities.  In short, the regulators are always behind the transgressors.

Whether its cycling or money management, enforcement alone will not minimize cheating.  Without a change of culture, dishonesty will plague both endeavors.  This year’s Tour de France has come to an end in Paris, and Chris Fromme, the winner, told the crowd that his victory will “stand the test of time.”  I hope he’s telling the truth and that his yellow jersey wasn’t corrupted by blood doping.  Cycling may have turned a corner.  Money management and Wall Street have not.


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