Intuitively, we tend to assume an investment manager who consistently has outperformed the benchmark is likely to continue to outperform the benchmark. And, conversely, we tend to assume that an investment manager who consistently has underperformed the benchmark is likely to continue to underperform. We also tend to assume that a manager with its own capital at risk is more likely to have its interests aligned with the interests of its investor clients.

To the best of my knowledge, there’s absolutely zero evidence to support either of these contentions. Let’s take the first. According to Nobel Prize–winning researcher Daniel Kahneman, we are all vulnerable to cognitive biases. One of these biases is the fallacy of persistency; we are hardwired to believe past outcomes are likely to persist. What the numbers consistently show, regardless of what performance measurement you’re employing or what you’re attempting to measure, is that performance over the long run rever