Some money managers are huge success, some huge failures, and others are just interesting.David Einhorn's performance has been struggling as of late.There are lots of variables involved in investing with well-known investors.There are really only four different stories that are written about fund managers:The huge success storyThe huge fund failureThe redemption storyThe cant-figure-out-whats-wrong storyJohn Paulson was the huge success story coming out of the financial crisis. Fund failures seem to occur on a regular basis, especially in the hedge fund community (which is strange because these failed funds were obviously not hedging anything). Theres a comeback story about Bill Miller written every 18 months or so because his performance is so erraticfrom his concentrated bets.This week brought us another round of the cant-figure-out-whats-wrong story starring hedge fund manager David Einhorn.The Wall Street Journaldid a long profile on the performance struggles Greenlight Capital has experienced filled with commentary from current investors, asset allocators, and industry experts. There were even some PR-scrubbed comments from Einhorn himself.I shared some thoughts on Einhorns struggles withInstitutional Investorin May:But Einhorns shorts on Amazon and Netflixpart of what he calls his bubble basket of some 20 to 40 stocksare head-scratchers to those who think those companies are growth machines that are here to stay. Obviously when we do have a market turn, youd think those highfliers will get dinged, says Ben Carlson, director of institutional assetmanagement at Ritholtz Wealth Management. But theyve had such a huge gain, theyd have to have enormous losses for him to break even.As long ago as 2012, Ritholtz Wealth Managements Carlson says he noticed an Einhorn tell when the manager penned an article for the Huffington Post called The Feds Jelly Donut Policy. In it, Einhorn took issue with the Feds easy-money policy, comparing it to sugar addiction. He had already been stocking up on goldwhich other value investors like Warren Buffett eschew because its an asset that doesnt produce anything. (Einhorn has a locker in Queens to hold physical gold and has offered investors a gold-denominated share class.)Carlson says this style drift was common among hedge fund managers he surveyed while doing due diligence in his previous job as an institutional financial adviser to nonprofits and foundations. The managers were bottom-up stock pickers precrisis, but their 2008 losses amid the financial meltdown turned their worldview upside down, leading them to a macro analysis that for years has been wrongheaded.I dont have much more illuminating to say about Einhorns plight. He could definitely be setting himself up for a comeback story if tech stocks ever take a huge dive. Or maybe hes lost the magic touch. I really dont know, which is one of the reasons its so difficult to make decisions on discretionary managers like this who arent transparent with their investors.Because of this, asset allocators come up with fancy due diligence methods and tracking tools to monitor performance and process (but mostly performance). Then there are the not-so-fancy forms of monitoring like this guy mentioned in the WSJ piece:The liquidity terms are onerous and out of the norm today, Mr. Pearlstone said. Investors would be more comfortable with those terms if the returns were better.Adding to distress among some investors is Mr. Einhorns pending divorce. If someone goes through a divorce, I usually get out, said Mr. Kielland, Mr. Einhorns early backer. I made an exception with David, but I made a mistakeHe has to be distracted: Im convinced thats 30% to 40% of why Greenlight has been underperforming.This seems rather unscientific to me. Im guessing if Einhorns performance was going gangbusters you wouldnt hear his investors mention his personal life. Citadels Ken Griffin went through a rather public divorce a few years back but his performance hasnt suffered like Einhorns. So no one really mentions it when handicapping his hedge fund.This is why rules of thumb for money managers can sound so intelligent but turn out to be more or less useless depending on the situation.During my endowment investing days I recall a number of unorthodox due diligence practices.One fund said they monitored a national golf handicapping database. If a hedge fund manager golfed more than a certain number of days a year, they wouldnt invest because that meant they didnt care enough about the fund (although most investors would probably be better off paying less attention to their portfolio, making a few investments, and going to the golf course, but I digress)Another endowment fund used private detectives to perform background checks. I even heard one story where they went through a famous hedge fund managers trash. Not sure what they were looking for but this seemed a tad excessive to me.Some simpler methods involve multiple site visits, massive questionnaires, and checklists for things like manager tenure, track records, portfolio characteristics, and risk profiles.When it comes down to it, most of these decisions are made based on performance, whether the decision-makers implicitly understand it or not. Einhorns fund will likely continue to see outflows until his performance improves.For asset allocators that believe in his process thats the exact opposite of what they should be doing. If you have a manager performing poorly that you think has just hit a rough patch you should be rebalancing into the pain.The reason more investors arent doing that is that (a) many institutional investors simply chase performance and (b) no one really knows if Einhorns best days are behind him or not. Ive been involved in these decisions in the past and there are never any easy answers.There are so many variables involved when assessing the process, performance, portfolio, and people when investing with well-known discretionary money managers that Im surprised more institutions havent completely given up and gone more rules-based and systematic.Quant and index funds arent as sexy as a star fund manager, but at least youll never have to hire Magnum P.I. to dig through their garbage or worry about the headline risk from their personal lives.SEE ALSO:'The selling is only just starting': Citigroup warns that markets are 'dangerously unsupported' and there's about to be a falloutJoin the conversation about this storyNOW WATCH: The world is running out of sand ' and there's a black market for it now
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