Here's the thing though: Over the course of the late great bull market, mutual funds not only tried to present themselves as the only game in town; they also waged a massive disinformation campaign. The public has long believed that mutual funds are inherently "safe" whereas hedge funds and futures funds are inherently "risky," in spite of massive evidence to the contrary. Obviously there are gunslingers and safe players on both sides, but the presentation has always been ridiculously skewed: for the longest time a pathetic mutual fund manager with no understanding of risk control could present himself as a conservative investment, whereas a CTA with a ten year track record of solid returns and modest drawdowns was still seen as a wild west cowboy by the public. The landscape will change as more information is disseminated. It's only logical to realize that 1) risk is dependent on the manager and the strategy, not the underlying instrument. You can have as much or as little risk as you want simply by adjusting your leverage. As the public understands this, they will be more willing to diversify across asset classes. Commodity index funds are already making significant inroads as people see there is a world beyond equities. 2) It's inherently stupid to take a long only approach and intentionally limit the ability to use hedging strategies or shorting strategies to profit in unfavorable market environments- like fighting with one hand tied behind your back for no reason. 3) The entire public doesn't have to be convinced to create a sea change; just the upper class portion that is savvy enough to understand basic financial principles. The top 20% of boomers probably hold 60% of total liquid assets for the group (not a verified statistic, just a rough guess). 4) Sure you have to have charisma and marketing ability etc., but that's beside the point. The point is that there will be an opportunity for up and coming managers who do have that combination. If you have absolute returns AND you have charisma AND you have marketing ability AND you have the ability to build a network and take a long term view, investing years of time and energy into building contacts and sustaining a track record, then yes I think the opportunities will be pretty incredible, especially given the way opportunity is going global. And it's always been this way. Unless you've already built a rep through a career in the industry, it takes ten or twenty years to go from being a no-name trader to a real player in the hedge fund world- not a problem if you're starting in your late twenties or early thirties. I agree with you that the financial world is subject to fashionable trends just like the walkways in milan or paris. But even on that basis, it won't be long before alternative investments and absolute returns become the trend du jour and long only strategies go the way of polyester leisure suits.
Darkhorse.... Excellent subject and posts.... Hat's off...... The end of the pseudo indexers and their restaurant going ...suit wearing capabilities!!!!!!!...along with their ex-sec lawyer buddies....
Exactly. I guess 'public' still believe in this myth. Worse - people who run financial firms and make securities law also, at least in my country. Yes, this is the truth about financial industry. It has nothing to do with logic. After few conversations with polish money managers and CEOs I can say that they just don't understand that simple thing, despite their PhD's, MBAs, etc. Typical response will be: yeah maybe, but it's risky! Hahaha! Seriously, I think many managers are affraid of hedging and speculation. They collect fees either in bull&bear markets doing nothing, why try harder and expose yourself to possible losses from active strategies? If you limit yourself to buying stocks, poor performance can be explained by outside factors: recession, terrorists, natural disasters, which are always 'unpredictable' or not included in VaR calculations (Taleb smiles here). True. No doubt about it. In a decade we'll see many new faces from alternative investment world in Forbes ranks. That's in America. I'm 26 but without world-class education I have zero chances to enter HF world.
you're not hearing me. i agree with ALL those points. where i disagree is in expecting any of that to cause a significant change. the industry needs measures of mediocrity, and it will find a way to make them acceptable to J6P.
because as one style withers, the surviving styles are competing against themselves - and most of them will now become the mediocrity replacements. hedge funds only look good when they are a small segment of the market being compared to the broader universe of offerings. when everyone is in hedge funds, they will turn out to have the exact same levels of mediocrity currently shown by the MuFus.
Db-waw......... It"s performance that matters... The public..me...anybody else cares about one thing.... "Making money"!!!!!!!!!!!!!! They don't care how ...or who....... If you have the statements and blotters....and your style can handle size...you can go to fund of funds....money manager performance companies....private client firms...and you will have a shot.... By the way...your track record doesn't have to be that long either...Some parties are more aggressive than others... People are starving for good performance...especially now...when the alternative in money market funds pays less than $10,000 per $1,000,000 per year....
It doesn't seem to make sense to invest in a mutual fund that tracks an index when you can simply just buy an ETF.A fund has many fees like load(sometimes),management,legal,accounting,12b-1,redemption,and commissions.
Mutual funds are a ploy to steal money from the unknowledgeable John Q public and put it into the hands of a few.
Even if this were true, the markets would still see a huge benefit overall. The irrationality of buy and hold / long only strategies can be seen as a real drag on the efficiency of capitalism. Replace that mindset with a truly performance based strategy and you take a dramatic step forward in terms of speeding up the creative destruction process through which the market continuously reinvents itself. More intelligent capital allocation = more innovation and positive change. When the old boy network of inefficient money managers comes crashing down, the network of dinosaurs they lethargically supported comes crashing down too. (That's my biggest problem with indexing by the way; how can economists make any claim of rational capital allocation when indexing relies entirely on INERTIA? If enough people declare the markets perfectly rational, IRrationality becomes the result!) Some also assume that an absolute return world would look like a mutual fund world except with the players replaced; I don't think this would be the case. As technology lowers cost barriers, smaller capital allocations become more efficient (just as huge power plants will eventually be replaced with micro-generators). Performance based compensation lets you pay the bills with a much smaller base than you need if you're going for a miniscule fixed percentage of assets. In an absolute return world, you might see thousands of players with an average base of $100 million under management (in addition to the handful with billions). Last but not least, it may well be that the coming wave of opportunity will dwarf the supply of skilled talent. Just imagine how crazy things will be when China, India and Eastern Europe all have growth prospects similar to Japan in the 80's or the US in the 90's. Major waves to ride up- and back down again.