Underperformance for investment managers is a tricky topic of discussion. When managers acknowledge a period of underperformance, it can be misconstrued by investors as accepting defeat. In reality, it is inevitable that every good investment strategy will experience a period of underperformance. Sticking with a strong investment strategy that is going through a period of underperformance is one of the hardest things for managers and investors to do, though it is crucial, given these are times where future “alpha” is generated. It seems somewhat straight forward, but in order for a strategy to deliver excess risk-adjusted performance, there needs to be times of underperformance. This is seen when the strategy in question becomes hard to hold and the weak hands are forced from the market creating the inefficiencies necessary to outperform in the future. While it appears simple to opine about ex-post and on paper (or on a computer), living through a period of underperformance is anything but simple or straight forward. This opinion piece from Cliff Asness at AQR is a good reminder of how hard it is to stick with an investment strategy though periods of underperformance, despite knowing that at some point in the future you are bound to experience it. If strategies that provide excess risk-adjusted returns were easy to hold, then it wouldn’t be long before they were arbitraged away, as there would be no “painful” periods of underperformance for investors to experience. As Asness points out in his piece, the recipe for investment success is finding a strategy that is, “based on basic economics and as much evidence as humanly possible, that can be done at high capacity and generates reasonable risk-adjusted returns that improve your portfolio, and then stick to it when it will inevitably test you more than you imagined.”