In the good old days there was a saying that if you let a million monkeys bash away randomly at typewriters they would, given enough time, eventually type out the complete works of William Shakespeare.  However this would not prove that the monkeys were educated.

In recent times it has also been opined that no matter how many bloggers publish on the web, little sensible commentary will ever emerge.

Applying the same theory of randomness to the world of investing produces the argument that if there are enough different funds & fund managers in the world then there will always be a few who produce fantastic returns in a single year, no matter how bad the market conditions in that year.  However in order for the results to be statistically significant (and not just random noise) then the generally accepted test is that the few winners should be in excess of 5% of the total sample size of funds.

Sadly last year proved that a statistically insignificantly small number of funds actually produced positive (let alone fantastic) returns.  It therefore follows that the few winners represent statistical “noise” and that claims by fund-of-fund managers to be able to select the “best of the best” hedge funds are therefore not significant (if last year’s alpha was truly just in fact statistical noise then reliably measurable alpha over multiple consecutive years does not exist in a significantly large enough size to be successfully selected by any market participant).

Randomness also ensures that next year there will be a new crop of “winners” for the marketing experts to promote – beware that next year’s winners are not guaranteed to be the same as this year’s winners though.  The wealth warning “past performance is not necessarily a guide to future performance” is put on funds for a very good reason.