Industries in which capital has become abundant and optimism unbridled often end up disappointing investors. Echoes of these capital cycle pitfalls are also evident in active fund manager selection. In the ‘alpha cycle’ a certain area of the market delivers high returns, stories then emerge not only about the compelling opportunities to be found but also about the savvy investors who are exploiting them. This intoxicating mix of unusually strong performance and seemingly irrefutable narratives draws increasingly large flows from investors who either believe the tales being woven or are compelled to chase the momentum. The more extreme this performance dynamic, the more investors are likely to mistake luck for skill, and the cyclical for the structural. Leading them to make the wrong decisions at a terrible time.*
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