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The Wedding Photographer Problem
Imagine a photographer who takes a thousand photos of a wedding and only shows the bride the one perfect shot where everyone is smiling, the lighting is golden, and nobody is blinking. Now imagine that same photographer putting that single photo on their website with the caption “I capture perfect moments every time.” This is essentially what happens in the investment world, except the stakes are your retirement savings rather than wedding memories.
The incubation trick is one of the quietest scandals in finance. Not because it involves anything technically illegal, but because it turns the entire premise of fund selection on its head. Fund houses create multiple funds in private, let them run for a year or two, and then only bring to market the ones that happened to perform well. The others simply disappear, as if they never existed. The winning fund gets a glossy marketing campaign, a compelling origin story, and most importantly, a track record that looks too good to be true. Because it is.
Why We Fall For It Every Time
What makes this practice so insidious is how perfectly it exploits the way our minds work. We are pattern seeking creatures living in a world that is far more random than we would like to admit. When we see a fund that has beaten the market for three years straight, we instinctively search for the skill that must have created those returns. We want to believe there is a talented manager behind those numbers, someone who has figured something out that others have missed. The alternative, that those returns might be nothing more than statistical noise dressed up in a suit, is deeply unsettling.
The mathematics of randomness guarantees that if you create enough funds with different strategies, some will perform exceptionally well purely by chance. This is not a flaw in the system. It is the system. If ten fund managers each flip a coin ten times, at least one of them will probably get seven or eight heads. That manager did not develop a superior coin flipping technique. They got lucky. But if you only ever hear about that one manager, and the other nine quietly exit stage left, you would be forgiven for thinking you had discovered a coin flipping genius.
Evolution In Reverse
The fund incubation trick is artificial selection masquerading as intelligent design. Fund houses are running a giant trial and error experiment on your behalf, except they only show you the successes and bill them as intentional masterpieces of financial engineering.
Consider what this does to the very concept of a track record. A track record is supposed to be evidence of repeatable skill. It should tell you something meaningful about what is likely to happen in the future. But a track record that has been cherry picked from a larger population of attempts tells you almost nothing. It is like judging a lottery winner’s number selection strategy. The numbers worked, yes, but that fact alone contains no useful information for anyone else trying to pick numbers.
The Map That Shows Only Successful Voyages
This creates a strange epistemic problem for investors. You cannot trust the track record, which is often the main piece of information you have to make a decision. You cannot trust the marketing materials, which are carefully crafted to tell a compelling story about the fund manager’s insight and skill. You are left in a position where the most important financial decisions of your life must be made with information you know to be systematically misleading. It is like trying to navigate with a map that shows only the successful journeys and omits all the ships that sank.
The fund industry will tell you this practice serves a legitimate purpose. New strategies need to be tested. Managers need time to refine their approach. It would be irresponsible to launch a fund to the public without first proving the concept works. These arguments sound reasonable until you realize they describe a normal pilot program, not a selection game. A pilot program would show you the results of the specific strategy they plan to use, including all the bumps and iterations. The incubation trick shows you only the strategy that happened to work during a particular market environment, omitting the nine other strategies that failed.
The Most Dangerous Winners
The irony is that the most successful funds during incubation are often the riskiest. If you give ten managers different mandates and tell them to do whatever generates the highest returns, the winner will likely be whoever took the most extreme bets that happened to pay off. That fund gets launched. Investors pile in, attracted by the stellar track record.
Then mean reversion does what mean reversion always does.
The extreme returns regress back toward average, or worse. The investors who arrived after the incubation period absorb the losses while the fund house has already collected its fees based on the inflated assets.
This dynamic reveals something uncomfortable about the relationship between fund houses and their clients. In theory, asset managers are hired to generate returns for investors. In practice, asset managers are primarily in the business of gathering assets to charge fees on. Performance matters, but mostly as a marketing tool to attract those assets. The incubation trick makes perfect sense when you understand it through this lens. It is an efficient way to manufacture marketing materials that attract assets, regardless of whether those materials predict future performance.
Where Skill Ends And Luck Begins
The practice also highlights a broader tension in how we think about skill versus luck in competitive domains. We live in a culture that celebrates winners and attributes their success to superior qualities they possess. This worldview is comfortable and motivating. It suggests that success is attainable through effort and intelligence. But in domains with high randomness and many participants, most winners are simply the lucky tail of a distribution. Acknowledging this does not mean skill is irrelevant. It means that separating skill from luck requires careful analysis and large sample sizes, not just looking at who won.
Professional sports offers an interesting contrast. When a baseball player hits .300 over a full season, that statistic has meaning because we can observe hundreds of at bats. When they do it for five or ten seasons, we can be reasonably confident in their ability. But imagine if teams could train a hundred players in private, only roster the five who happened to hit .400 in practice games, and then market those five as generational talents. That is closer to what happens with incubated funds. The sample size that actually matters, the one that includes all the attempts, remains hidden.
Stories We Tell About Numbers
The deeper you look into this practice, the more it reveals about constructed realities in markets. So much of investing is storytelling. A fund needs a narrative that explains its returns in a way that makes those returns seem repeatable and intentional. The incubation period provides time not just to generate returns, but to develop the story that will explain those returns. By the time the fund launches publicly, every aspect of its history has been packaged into a coherent narrative about why this particular approach will continue to work. The narrative is not technically false, but it is deeply incomplete.
This connects to a phenomenon psychologists call the narrative fallacy. We have a deep need to explain events with stories that make sense in hindsight. When a fund performs well during incubation, it is easy to construct a compelling story about why the manager’s insights were uniquely positioned to capitalize on market conditions during that period. The story feels true because the outcome is already known. What gets left out is all the other stories that could have been told about the funds that failed during the same period, each with their own seemingly logical explanations for why that particular approach should have worked.
Why Nothing Changes
The regulatory response to fund incubation has been unenthusiastic at best. There are disclosure requirements in some jurisdictions, but they are often technical and buried in documents that few investors read. The practice falls into a grey area because fund houses are not technically lying. They are just selective about what they choose to tell you. It is the financial equivalent of a dating profile that only includes your best photos and most interesting stories. Not dishonest exactly, but hardly the full picture.
What makes reform difficult is that incubation is wrapped up with legitimate activities. Fund houses do need to develop new strategies. Markets do change, requiring new approaches. There is a reasonable case for testing ideas before exposing public investors to them. The problem is not testing per se, but the selective revelation of results. If every incubation experiment were disclosed, including the failures, the practice would lose its misleading power. But that would also eliminate its marketing value, which is the actual point.
The Investor’s Impossible Position
For individual investors, the existence of the incubation trick creates a challenging environment. You cannot simply avoid newly launched funds, because some of them will be genuinely good. You cannot rely on track records, because you do not know how many failed attempts came before. You cannot even trust your own judgment about whether a strategy makes sense, because the human brain is excellent at constructing plausible explanations for random outcomes. You are left with very few good options beyond radical skepticism or resignation to index funds.
The practice also raises questions about what we are really buying when we invest in an actively managed fund. The standard answer is that we are buying expertise. But if that expertise is demonstrated through a process that systematically filters out all the failures, we are not really buying expertise. We are buying a lottery ticket with the serial numbers filed off. The fund house has simply done the work of buying many lottery tickets and selling us the winning one, retroactively framing the purchase as visionary.
Rewarding The Wrong Behavior
Perhaps the most troubling aspect is how the incubation trick incentivizes the wrong behavior. Fund managers during incubation have every reason to take excessive risks. If the risks pay off, they get a launched fund with an impressive track record. If the risks blow up, that particular fund just never gets mentioned again and they try something else. This creates a ratchet effect where the funds that survive to launch are disproportionately those that took the most extreme bets during the incubation period. Public investors then inherit portfolios positioned at the extremes of the risk spectrum, often without realizing it.
The knowledge that this practice exists should fundamentally change how we evaluate investment options. A three year track record means something very different if you know it might be the sole survivor of ten different attempts. The question is no longer whether the fund performed well, but what are the odds it would have performed well by chance given the number of similar funds that were created and discarded.
The incubation trick endures because it exploits several of our deepest cognitive vulnerabilities simultaneously. We want to believe skill exists and can be identified. We are drawn to winners and their stories. We struggle to reason about selection bias and survivorship.
Fund houses have not discovered a way to consistently beat markets. They have discovered a way to consistently beat our pattern recognition systems. That might be the more valuable skill.
What You’re Actually Looking At
When you see that gleaming track record on a newly launched fund, remember the wedding photographer. Remember that what you are seeing is the one perfect shot selected from hundreds of attempts. The other photos exist, or existed, but you will never see them. The fund house has already done the editing work for you, showing only what makes them look good.
This does not mean all actively managed funds are bad investments. It does not even mean that incubated funds are necessarily worse than others. What it means is that the single most important piece of information used to evaluate these funds has been manufactured. Everything else you think you know about the fund builds on this tainted foundation.
The uncomfortable truth is that beating the market consistently is extraordinarily difficult. If it were easy, incubation would not be necessary. The fact that this practice exists and persists tells you everything you need to know about how hard it actually is to generate superior returns through skill alone. Fund houses have found it easier to simulate the appearance of skill through clever selection than to actually develop skill itself.
In the end, the incubation trick is less about deception and more about the stories we are willing to believe about ourselves and markets. We want to believe that the winners won because they were smarter or worked harder or saw something others missed. The alternative, that markets are largely efficient and most outperformance is luck, threatens too many business models and egos.
So the trick continues, photographer after photographer showing brides their one perfect shot, while the rejected photos pile up unseen.
