The Keynes Fund

March 12, 2007

As Casey Stengel said, "[F]orecasting is very difficult, especially if it involves the future.”

John Maynard Keynes is undoubtedly one the most important figures in the history of  economic thought.  His book, The General Theory of Employment, Interest and Money, revolutionized the field, changing the way the world looked at the economy and the role of government in society.

One of Keynes's beliefs was that an understanding of the business cycle paved the path to riches. Dr. Sushil Wadhwani agreed with that principle. Wadhwani is a former Reader/Lecturer at the London School of Economics (1984-91). He was also the Director of Equity Strategy at Goldman Sachs International (1991-95). From 1995-99, Wadhwani was Head of the Quantitative Systems Group, a member of the Management Committee and Partner at Tudor Proprietary Trading LLC, a fund management company. And from June 1999 through May 2002, he was a member of the Bank of England's monetary policy committee (the British equivalent of our Federal Reserve).

With that impressive resume, Wadhwani raised $1 billion dollars, and in 2003, he launched the Keynes Fund. This hedge fund's strategy was to profit from the resolution of imbalances in the global economy.1  

Despite those impressive credentials, the fund ceased operations in December 2006. After a strong start, performance lagged in 2005. It then produced a small loss in 2006. Over its life the fund produced an annualized return of under 6 per cent.2 By comparison, for the period 2003-06, the S&P 500 returned almost 15 percent per annum and the EAFE Index returned almost 25 percent per annum. Other asset classes did even better. For example, the Wilshire REIT Index returned almost 30 percent per annum, and the MSCI Emerging Markets Index returned almost 37 percent per annum. Apparently, the "mindless" indexes did a far better job of profiting from the imbalances than did the Keynes Fund.

What makes the performance of the Keynes Fund even more distressing is that the global imbalances the fund was designed to exploit grew even larger. For example, both the U.S. trade deficit and the Chinese trade surplus continued to increase. Meanwhile, the dollar fell sharply. And yet, the fund failed to profit from the very trends it was designed to exploit.

The Value Of Economic And Market Forecasts

William Sherden is the author of a wonderful book, The Fortune Sellers. Sherden was inspired by the following incident to write his book. In 1985, when preparing testimony as an expert witness, he analyzed the track records of inflation projections by different forecasting methods. He then compared those forecasts to what is called the "naive" forecast-simply projecting today's inflation rate into the future. He was surprised to learn that the simple naive forecast proved to be the most accurate, beating the forecasts of the most prestigious economic forecasting firms equipped with their Ph.D.s from leading universities and thousand-equation computer models.

Sherden then reviewed the leading research on forecasting accuracy from 1979 to 1995, covering forecasts made from 1970 to 1995. He concluded that:

·       Economists cannot predict the turning points in the economy. Of the forty-eight predictions made by economists, forty-six missed the turning points.

·       Economists' forecasting skill is about as good as guessing. For example, even the economists who directly or indirectly run the economy-the Federal Reserve, the Council of Economic Advisors and the Congressional Budget-had forecasting records that were worse than pure chance.

·       There are no economic forecasters who consistently lead the pack in forecasting accuracy.

·       There are no economic ideologies whose adherents produce consistently superior economic forecasts.

·       Increased sophistication provides no improvement in economic forecasting accuracy.

·       Consensus forecasts offer little improvement.

·       Forecasts may be affected by psychological bias. Some economists are perpetually optimistic and others perpetually pessimistic.                                                                

Since the underlying basis of most stock market forecasts is an economic forecast, the evidence suggests that stock market strategists who predict bull and bear markets will have no greater success than do the economists.


Casey Stengel, generally considered one of the greatest of baseball managers, was known to have said: "Forecasting is very difficult, especially if it involves the future." This bit of wisdom applies as much to investing as it does to baseball. The historical evidence suggests that, even if you had a crystal ball that allowed you to foretell future events (the global imbalances will continue to worsen), timing the market would still likely be a loser's game. The winning strategy is to adhere to a well-thought-out plan and ignore the noise of the market-and the noise of all forecasters.

Larry Swedroe is the author of "The Only Guide To A Winning Investment Strategy You Will Ever Need," "What Wall Street Doesn't Want You to Know,"  "Rational Investing In Irrational Times, How to Avoid the Costly Mistakes Even Smart People Make Today," and " The Successful Investor Today: 14 Simple Truths You Must Know When You Invest," and co-author of "The Only Guide to a Winning Bond Strategy You'll Ever Need (January 2006). Larry is also the Director of Research for and a Principal of both Buckingham Asset Management, Inc. and BAM Advisor Services LLC in St. Louis, Missouri. However, his opinions and comments expressed within this column are his own, and may not accurately reflect those of Buckingham Asset Management or BAM Advisor Services.

1.      Edward Chancellor and Martin Hutchinson, "Keynes's Other Hypothesis", Wall Street Journal, February 3-4, 2007.

2., February 2, 2007.


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