By Simon Kerr, Principal of Enhance Consulting
I worked with a portfolio manager in the Eighties who got a list of prices over the phone each morning – he did not have a price terminal at all. Today everyone in professional money management roles will have a screen with a price feed (Bloomberg, Reuters etc.), and all hedge fund managers have the NAV/P&L ticking over in the corner of their screen more or less whatever else they are doing. I have often wondered whether it was a distraction to the processes of deciding whether to buy or sell securities. Now there is evidence to consider on the point.
In my work as a consultant to hedge fund managers I spend a lot of my time determining how traders, portfolio managers and analysts spend their time. Mostly this is about getting to grips with the inputs and processes used to manage capital (or data or ideas). It specifically requires assessing the quality and quantity of information flow and how it is manipulated, stored, analysed and used to make investment decisions.
For example below are two graphics to illustrate how a particular manager allocates his research time, and how the same manager (Neil Meadows of Laurentia) prioritises the factors going into his decision making*.
Source: Hedge Fund Insight
When not doing corporate strategy level work for hedge fund management companies, a lot of the work of Enhance Consulting is about sharing best practice. Usually this is letting an underperforming hedge fund manager know what a top performing manager does in various dimensions – resource quantity, use of resources (human, data, and technological), and organisation of the investment routines. From a consultancy point of view it is very useful to bring in insights from other fields that have application in asset management generally or hedge fund management/trading specifically.
A concept that on which a lot of store gets set is multi-tasking. But rather than accept that it is a necessity in modern working life and a sure route to being more productive, we will look at the evidence and consider how the reality of the effectiveness of multi-tasking applies to roles in hedge fund management.
Studies on Multi-Tasking
Physical multi-tasking is the ability to do many physical things at the same time. The classic example is mothers watching their children while cooking. This kind of multi-tasking, efficient or not, is clearly essential and research over some years has shown that women are better at it.
True multi-tasking could be defined as performing two or more tasks at the same time as effectively as doing them one at a time. Is this possible, and, if so, for how many?
French scientists designed experiments to test people’s abilities to accomplish up to three mental tasks at the same time. The tasks involved matching letters in different ways. When volunteers were doing just one task, there was activity in both the right and left frontal lobes, suggesting that the whole brain was working on the job. When people took on a second task, the lobes divided their responsibilities – the lobe on the left side of the brain focused on the first task, while the lobe on the right focused on the second.
Then the subjects were given a third task – what happened then was that one of the original goals disappeared from their brains (detected using MRI scanning) and people slowed down and made many more mistakes. Thus suggesting that the brain can’t do more than two tasks at once (at the most). So that, for example, someone writing a report might also be able to check e-mails, but if that e-mail asked for a decision about something that would amount to a third task, and the brain would be overwhelmed.
What about people who are constantly multi-tasking (checking e-mails, writing, watching television and texting – all at the “same time”) and believe that the more often they multi-task the better they get?
Researchers at Stanford University split their subjects into two groups: those who regularly do a lot of media multi-tasking and those who don’t. In one experiment, the groups were shown sets of red rectangles alone or surrounded by blue rectangles. Each pattern was flashed twice, and the task was to decide whether the red rectangles in the second frame were in a different position than in the first frame. What they found was that the “high multi-taskers” were constantly distracted by the irrelevant blue images. Their performance was very poor.
Because the high multi-taskers showed they couldn’t ignore the blue rectangles, the researchers wondered if this meant they had better memories. The second test proved that theory wrong. After being shown sequences of letters, the high multi-taskers did a bad job at remembering when a letter was making a repeat appearance.
If the heavy multi-taskers couldn’t filter out irrelevant information or organize their memories, perhaps they excelled at switching from one thing to another faster than anyone else? The subjects were told to pay attention to numbers and had to decide if the digits were even or odd. When told to concentrate on letters, they had to say whether they were vowels or consonants. Again, the heavy multi-taskers underperformed the light multi-taskers.
To quote from Professor Nass of Stanford “One of the biggest delusions we hear from students is, “I do five things at once because I don’t have time to do them one at a time.” And that turns out to be false. That is to say, they would actually be quicker if they did one thing, then the next thing, then the next. It may not be as fun, but they’d be more efficient”.
Eating Pizza and Dealing in MBS
Let’s apply some of the insights of the academic research on multi-tasking to asset management. The cliché of traders eating pizza in front of a bank of screens, and talking on a speakerphone and a headset phone at the same time in order to set up deals, can be difficult for some people, but is really only two tasks (eating and dealing). The traders have several inputs to their decision making, but they will typically, and most of the time, take them sequentially. If market prices are changing at the same time as internal prices are changing (two screens or two windows on a screen), and the client is giving their biases to the trader at that exact same time over the phone, that is going to be a challenge for the trader to cope with.
We all have a number of different tasks and mini-projects to do at work. We may be required to complete some computer-based compliance training by a specific date, read our messages of exhortation from the CEO of the company, and attend the daily morning meeting. The point at issue is how many of these can we do at once at the required level? Some multi-tasking is necessary in nearly all of the front office roles of money management.
The activities which are the core of managing money are risk management, investment analysis and execution. Each require specific knowledge and experience to carry out at a high level. In line with the academic evidence investment analysts will spend a lot of their time on one task, as will dedicated dealers and risk managers. The role with most potential for over-tasking (multi-tasking beyond two tasks) is a portfolio manager.
Most of the time the core activities of risk management, investment analysis and execution are kept as separate activities, but in smaller hedge fund firms and at the higher levels of asset management firms they can be combined in the CIO or most senior risk takers (say the remaining founder partners of Brevan Howard). It is at this level of the firm (partner and senior executive) that true multi-tasking is observed and probably required. When a risk management problem is accelerated through the firm it will ascend to the level of CIO; when a serious compliance issue has to be brought to Board level it will be brought to the attention of the CIO whose name is over the door, whatever else they are doing.
In an era of mobile devices it is easy to carry the means of true multi-tasking. One prominent hedge fund chief is known for carrying two Blackberrys. If he is in a client meeting, and his wife calls him at the same time as the market reacts badly to employment data he is in trouble somewhere. It is now common to see the smartphone being checked during a meeting. The academic evidence referred to here (referenced fully below) suggests that if the investment professional is still thinking about his market problem in a meeting, is checking his phone/I-Pad for market prices/news, and then gets asked a key question from the prospective client he may drop the ball.
There is a natural limit to multi-tasking based on the number of brain lobes we can use for parallel processing. Hedge fund executives with multiple responsibilities should be wary of testing the boundary of two too often. Do you need to check today’s P&L in the corner of the screen quite so much?