The Valeant story confirms that human selection systems are poor and risky, can lack ethics and can fool itself into the illusion of wealth. Any review of mistakes is hindsight bias because even the utmost smartness cannot beat the need for risk management. The whole reason why pension funds are embracing baskets and avoiding hedge funds, which incidentally witnessed the largest number of closures last year after 2008. Valeant’s focus on high rate of returns transformed it into a risky active manager which stopped focusing on the business but concentrated primarily on the stock price. This eventually lead to a large decline which destroyed its reputation along with the wealth. You can recover wealth but not reputation. The laws of reversion also work on reputation, the better it gets, the harder it’s to maintain it.
Jiseki systems were able to kick out Valeant out of its preferred status not only because it moved out of its top performing status early Jan 2016 but also because our AI systems identify outlier performance and underweight them if they fail to follow simple statistical rules.