Random Walks With Russian Monkeys in Norway

Ashby Monk

No doubt my college professor Burton Malkiel had a smile on his face when he read that a Russian monkey outperformed 94% of professional asset managers in 2009. After all, he popularized the term ‘random walk’ and used to tell our class to put our money in index funds and simply forget about it. In his view, if you tried to beat the market, you’d eventually lose.

It’s a provocative point that is incongruous with the huge asset management industry (and its super-size bonuses). After all, if markets are random, why are we paying asset managers so much? Put simply, the random walk clearly does not hold for all investors; if it did, Warren Buffet wouldn’t be a multi-billionaire. In this regard, there has been a widespread debate over the merits of active (alpha) and passive (beta) management strategies for some time.

Interestingly, this debate has recently popped up in Norway. Following a dismal year in 2008 for the country’s SWF, the Storting (i.e. Parliament) ordered an assessment of the NBIM’s active management policies. Significantly, the NBIM has just delivered their defense, and it’s an interesting read. While much of it talks around the issue, I found this to be an interesting point:

“It is possible to create value by analysing individual companies and securities. To succeed in this, we need to exploit economies of scale, cost advantages, bargaining power and capacity. Investment opportunities vary over time. Given a stable regulatory framework that ensures a long-term investment horizon, we can exploit opportunities that short-term investors cannot. This will improve the trade-off between return and risk. Long-term investment strategies must be properly communicated and anchored in the governance structure, but hold the greatest potential for active management.”

I tend to agree that the more money an investor has and the longer the investment time horizon, the more likely an active management policy can succeed. But would Malkiel be convinced by the above?

5 Responses to “Random Walks With Russian Monkeys in Norway”


  1. 1 rien huizer January 21, 2010 at 8:58 am

    Ashby, shame on you. This sort of reasoning would prove the utility of religions by pointing at the enormous resources spent by the faithful..Despite refinements over time, economics still teaches the efficient markets hypothesis. Strangely enough, politicians in many countries spend public money on the services of people who -implausibly- claim that they can outperform the market (and a few do that all the time but rarely the same), never guaranteeing that they will, while the same gvts spend considerable resources on market enhancement and -regulation, which should make those services largely redundant. A clever difference in long- en short term policymaking perhaps?

  2. 2 Ashby Monk January 21, 2010 at 12:07 pm

    Rien: If you are referring to my last sentence about the size of the fund, my logic really comes from the notion that most people would vary their investment strategies according to the size-of-bet (the value of assets to be invested). Indeed, I take this from a paper on “size of bet”. Read this from Risk Management and Insurance Review and then let’s chat http://papers.ssrn.com/sol3/papers.cfm?abstract_id=909521.

    • 3 rien huizer January 21, 2010 at 3:14 pm

      No, I referred only to the second paragraph, and not very seriously I have no problems with the Norges Bank paper either, as an excellent concise survey of theoretical approaches. Unfortunately it is part of a largely political debate. Norways fund is a bit of a mission impossible: it must invest abroad, it has a major long term problem with FX (something different from “an FX problem”, it does not have liabilities and its principal (the Norwegian people) is goverened democratically which makes any mandate inherently variable, hence short term. Still an interesting experiment though!

  3. 4 Ashby Monk January 21, 2010 at 3:47 pm

    Ah yes. It is a political debate. Thanks for the comments, Rien. Cheers.


  1. 1 To Be, Or Not To Be: A Persistent Question for Some SWFs « Oxford SWF Project Trackback on August 2, 2010 at 6:53 am

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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