Sam Kunz Thinks Overconfidence Plagues the Industry

To see this article in digital magazine format, click here. 

“I’m originally from Geneva, and started at the roughly $3 billion Policemen’s Annuity and Benefit Plan in Chicago in 2008. The investment process at the scheme is different from the structures I was accustomed to. In Switzerland, we would have an idea in the morning and would act on it in the afternoon, so we made more errors but didn’t miss as many opportunities. In the US, we make fewer mistakes, but we don’t take as much advantage of shorter-term trends. When I talk about asset allocation with trustees, there’s a tension between the optimal allocation—what we should be doing—and the appropriate allocation—what we can do. For example, we feel there are opportunities in opportunistic real estate and private equity, but we’re forced to the status quo because of our funding ratio. Alternative investments have been a great area of interest as well. But you first need to ask yourself: ‘Is the market trending or ranging?’ The direction of the trend is not as important as defining whether you’re in a range expansion or contraction. In a directional market, the best one can do is buy and hold or sell and hold—you don’t need to buy a product that charges 2 and 20, you can just hold the S&P passively and ride the wave. But when the market is ranging, alternatives become much more attractive, as they’re more nimble and thus better equipped at catching tops and bottoms. I don’t like to make predictions—it’s not my area of expertise. I try to stay very humble in this area, because I believe that overconfidence is a bias that plagues the industry. People should note their level of confidence each time they make a prediction. It’s rare to find people that use this approach in finance. Maybe that’s because making predictions is more glamorous. Active management: In Switzerland, mushroom hunting is very popular. In the fall, there is a high probability there will be mushrooms when the sun is shining just after rain. But perfect conditions don’t guarantee you will be successful in finding any. The same holds true for active management. One interesting point of view is Andrew Lo’s Adaptive Market Hypothesis, which asserts that alpha is unstable, moving from one segment of the markets to another. At any given point of time, there are inefficiencies somewhere available to someone, but it doesn’t mean that investors are able to capitalize on them. In other words, markets might not be efficient, but the trick is to be able to take advantage of that inefficiency despite its versatility. Therefore, the budget for active management should be spent very wisely because our ability to consistently capture these opportunities is low.On a personal level, working at the fund is an amazing platform to meet and have discussions with very smart people. When I started in the finance industry, access to information was much more of a challenge. Now, the difficulty is determining what’s really important. There is also a lot of leakage and, unfortunately, many good ideas are never implemented. There is a need for variance and a need for closure in every process, and finance is no exception. You need to gather as much information as possible and then isolate what is critical to find the adequate answer to a given problem. I try to be very organized with the news and research I receive because my goal is to combine different viewpoints and extract innovative ideas in order to generate the best possible solutions.”