AN ALTERNATIVE THEORY OF NATURAL SELECTION | ALLABOUTALPHA 1-17-2013
Natural selection rewards the organism with a higher rate of survival.
The theory goes on to postulate that naturalselection acts to preserve and accumulate minor advantageous genetic mutations. If we consider the investor to be the
organism, aligning interests with the talent that occupies the “beneficial mutation categories” of alternative investing
leads to an elevated form of life, or perhaps a fully funded investment mandate. Less desirable species (orinvestments) ultimately cease to exist in favor of more desirable ones. This part of the evolution process is often in apush/pull relationship when applied to investment management. As a good alternative idea/manager/investmentvehicle attracts greater numbers of followers, the ability to continue to perform at the same or higher levels of performance erodes, and other opportunities arise to take its place. One could blame greediness or complacency onthe manager who fails to stave off this
competition, but perhaps it’s the natural selection process in action.
Being a little bit right a lot of the time sure beats being wrong one or two mega-times.
This piece of natural selection isperhaps the most recognized commonality in the alternative investing world. In the long run, if an investment manager
fails to control the downside, there isn’t much of an ability to last long enough to capture the upside. For investors,
swinging for the fences when making investment decisions is likely to result in knocking oneself right out of the gamebefore having amassed enough of an investment cushion to be able to take on high-
risk investments. The “stay rich”
mentality of slow and steady progression through all market cycles and strong risk management practices to protectagainst the unforeseen happenings is the investment version of natural selection that very few alternative managers orinvestors care to argue against.