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An Alternative Theory of Natural Selection

An Alternative Theory of Natural Selection

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Published by dahhome
This article compares Darwin's Theory to aspects of alternative investing that support the benefits of time in both.
This article compares Darwin's Theory to aspects of alternative investing that support the benefits of time in both.

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Categories:Types, Business/Law
Published by: dahhome on Jan 18, 2013
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04/28/2014

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AN ALTERNATIVE THEORY OF NATURAL SELECTION | ALLABOUTALPHA 1-17-2013
 
An Alternative Theory of Natural Selection
By Diane Harrison
 It is 2013: a new year, an opportunity to start a fresh YTD performance chart, and a chance to climb a little further outof the 2012 hole in which a fair amount of the alternative investment world wallowed. January is often a time wheninvestors and managers forge resolutions to do better
take stock of portfolios, review what seems to be working andwhat seems to be off, and implement a course of action for the coming year.Fiscal cliff avoidance aside, the alternative landscape appears littered with potential pitfalls, pratfalls, and protractedperformance slumps. Some of us might feel that a trip to the Galapagos Islands would be more enjoyable than diving into the fiscal waters of 2013, so it could be interesting to filter this viewpoint with a little evolutionary context courtesyof Charles Darwin.
There are many proponents and opponents of Darwin’s theory, engaging in a lively debate that has spanned more than
a century. The theory goes something like this:
Darwin’s general theory presumes the development of life from non
-life and stresses a purely naturalistic (undirected)
“descent with modification.” That is, complex creatures evolve from more simplistic ancestors naturally ov 
er time. In a
nutshell, as random genetic mutations occur within an organism’s genetic code, the beneficial mutations are
preserved because they aid survival
 —a process known as “natural selection.” Natural selection acts to preserve and
accumulate minor advantageous genetic mutations. Over time, beneficial mutations pass on to the next generationand the result is an entirely different organism (not just a variation of the original, but an entirely different creature).(Source: www.darwins-theory-of-evolution.com
 
 
Certain elements of the theory seem more likely to be true than false, particularly as applied to financial elements. Let’s
examine five of these.
Time is a good thing.
So, if one assumes that complex creatures evolve from more simplistic ancestors naturally overtime, being an investor who has been around longer could mean having gained an ability to judge what is singular andwhat is systemic in the markets
in other words, an ability to separate the melodies from market noise. Investmentmanagers with longevity have learned a thing or two about getting it right. Investors who have been in the marketlonger have also presumably learned both from their mistakes and have gotten better at identifying good choices.
Ageism in alternatives means having been at it long enough to know what “it” is.
 
It pays not to follow the herd.
According to Darwin, beneficial mutations are preserved because they aid survival. Forinvestment managers, it literally pays to be a standout. Beneficial mutations in the investment world are the leaders,the outliers in the north-by-northeast quadrant of the efficient frontier. If they are considered beneficial, it is becausethey achieve performance results without taking on excessive risk in so doing. Managers who care about attracting investors are always seeking to improve their relationship with the top left quartile of the risk/reward chart. Thosepossessing the ability to land there and stay there are the ones who, by being better, dare the rest to follow.
 
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.

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