When the tech bubble burst in 2000, causing Nasdaq to plummet and drag other indices into the vortex, few investors enjoyed immunity.

The other development in the investment industry that may have worked against broad acceptance of Fernwood’s offerings is the continuing shift among many portfolio managers away from relative return strategies and toward absolute return methods. Absolute return strategies were the hallmark of portfolio managers during the 1960s. The objective of an absolute return strategy is to generate a positive financial return for assets under management, regardless of broad market movements. Absolute return managers have wide discretion of when to buy or sell in any market of choice, a technique that most hedge fund managers today find effective.

As indices and portfolio management science gained popularity in the 1970s and early 1980s, institutional portfolio managers increasingly favored relative return strategies, attempting to show portfolio management prowess relative to popular indices in each asset class. These strategies stress quantitative theory and computer-driven statistical tools, such as the capital asset pricing model and related efficient frontier analysis, for the investment process.

Several factors in the capital markets around the turn of the millennium caused asset managers to reevaluate the effectiveness of relative portfolio management strategies. When the tech bubble burst in 2000, causing Nasdaq to plummet 50 percent and drag other indices into the vortex, few investors enjoyed immunity. Nor were they amused by merely losing 40 percent, albeit performing positively relative to the market indices. This incident, along with the seemingly inexorable trend toward correlation among traditional securities, shook the very foundation of the correlation matrix upon which relative strategies and efficient frontier models are based. Today, absolute returns are back in vogue, along with statistical coefficients such as alpha, a measurement of return attributed to specific securities independent of general market fluctuations. Investors increasingly look for fund managers who combine strong skills in fundamental analysis with the flexibility to move from market to market, unconstrained by benchmarks and indexing strategies.

Within this context, Fernwood’s pitch may have struck one or more wrong chords, despite the polish and seemingly sophisticated presentation. Institutions and experienced investors were in no mood to readily embrace an efficient frontier model fueled by erratic data from a new and often perplexing asset class in an inefficient industry. The irony of these circumstances is that an absolute strategy can work well in the inefficient art market. Indeed, the variety and dynamism of the many underlying category sectors provide fertile buying, selling and even arbitraging opportunities for nimble art fund managers. New products measuring market performance by artist and by collector categories serve to assist with investment analysis. The quality of art data, including the possibility of disclosed dealer prices and transaction costs, improves steadily. Meaningful price-performance indices for art sectors will surely follow.

The validity of art as investment remains, despite the collapse of Fernwood and ABN Amro. Aspiring fund managers may well benefit by speaking less of efficient frontiers and more about the benefits of taking an absolute return approach on an attractive—and temptingly inefficient—playing field.