You are telling all the elite traders and small mom and pop retail traders like me we have no hope of beating the market? So my question to you sir is: Do you trade, if you do how do you deal with not stand a chance, if you do not why are you here? Actually I do not disagree with you that we are facing long odds but life itself is a long odds, many careers are long odds.... Should we give up because of the long odds? Best wishes.
It is my take away from the report. Others can take away what ever they want. I think it was first published 15 years ago and I look forward to the report every year to see how portfolio managers are doing. Most of the reports and managers do concentrate on risk adjusted return of the fund, but investors are not worried by risk adjusted returns of individual funds or asset classes. It is whole portfolio return and risk tolerance that matters. That is where retail investors will benefit. For ex: When the investors very young and close to 30-40 years investing time left to accumulate wealth, they do not have to go cookie cutter allocation advised by the financial community. Some advise 100% equity or 80:20 equity/bond allocation. Studies have chosen (posted upthread) during any 20 year period lowest return from the balanced portfolio was slightly above 2.5%. My preference is to leverage anything which has positive risk premium over the long run as long as the cost of leverage is less than that premium. Trading account should be utilized to lever up this portfolio. Here we are not trying to beat the market return, but enhance using that leverage. Yes I do trade. 20% my portfolio is in trading account. I am an asset class junkie and have 14 asset classes in 80% of investing account. 10% of trading account I follow similar to managed futures and 10% in short index vol and some hedges. I am thinking of moving 5% short index vol to CAT bonds, since in my opinion short vol has run its course and CAT bonds have fallen hard recently and fits my theme of further diversification. Why i am here? As an investment junkie I follow several forums. I do enjoy postings from few people like "sle, newuldmn and GAT" I do not know how to answer that question, but for an young person many other careers are much rewarding for the effort they put in compared to trading career. Just my opinion. Best wishes also.
The overwhelming majority of those "studies" don't recognize that many "active managers" are closet indexers. It's probably a good advice that benchmarking should be the default choice, but there is no excuse for the investors with enough resources to point fingers at those "studies", shirk their responsibilities for proper research on active/passive management and call it a waste of money. If you have no resources for this kind of research, just admit that passive makes sense in your own circumstances but you don't really know if active management works or not for anyone else. Another point is the tracking error. If you want a very small tracking error, it's fairly obvious that you'll underperform by paying active management fee.
Agree on closet indexers and disagree on every thing else. We can agree hedge funds have lot more resources than average joe. Here are their results. They did with lower standard deviation, but other investors can achieve the same thing by adding bonds. Throwing lot of resources and time does not always produce result. Now you have to perform that much more than index to outperform. That cost drag is huge. I am not sure where you are located, here in US short term trading and long term investments are taxed differently. Difference in tax rates itself can be 20%. Now you have to overcome that drag also.
First, I don't really understand why performance of distressed debt or trend following should be compared with S&P500. It's apples and oranges. Second, using that index does not really avoid the problem similar to closet indexers because lots of those funds are giving you beta under guise of alpha. Iirc there was an article or a study that long/short equity funds as a group are in fact long funds. Overlaying S&P with a flawed index on a chart does not really substitute for a proper study that would get rid of closet indexers/beta-providers and also try to incorporate the qualitative aspects like process. Finally, there will certainly be someone with a better methodology than the author of such study. The tax issue is a strawman. I never said every ET member in the US should disregard taxation of short-term profits and try intraday trading. I said that it's silly to assume that no one has an ability to pick managers, asset classes or stocks. If you say that an average retail investor should go passive because they don't have knowledge/time/assets/willingness/access/edge, then I'll agree with you. If you say that active management as a concept is a folly because one cannot beat the benchmark consistently other than by luck or such manager cannot be identified, then I'll disagree with you.
srinir, Thank you for your thoughtful response. I have a question for you: Can you provide additional comments on risk adjusted returns. As a non financial layperson, it is puzzling to me. I do understand the overall concept of modern portfolio theory but typically economists and financial analysts equate volatility to risk. How valid is it to equate volatility to risk? I looked at the return of RUT vs SPX, almost consistently RUT has a higher return for any running windows of 20+ years. It did have higher volatility but did not seem to affect the mean returns? Another question: In your opinion is the market random. If so, it is futile to try beat it, if not then perhaps one can find the key to beating it. Thank you in advance for your coaching. Regards,
However, it is hard to argue with facts. Over a long period, most active funds under performed their benchmarks. The simple fact that they charge ~1+% fees + trading costs means they would have to perform better by ~1.5% to equal the benchmark. If you look at the volatility and risk of SPX, 1.5% a year is a huge gap that is difficult to overcome. That is why I only invest in individual stocks, saving the 1.5% that active managers charged.
In your previous post, you mentioned investors with enough resources and with proper research some how can achieve superior returns. Well Hedge fund investors are those kind of investors. Those are the type of investors, who are supposed to get away from closet indexers in the retail space and now you reject hedge fund index and call them "closet indexers and beta providers"? That chart did not come from any study. It came from hedge fund index provider itself and it is in the front page once you log in. https://lab.credit-suisse.com/#/en/home They compare their index to SPX and Hedge fund index does not just include distress debt and trend following. Just like SPX include many sectors, hedge fund includes many strategies. Here are the components of that index What is your definition of active investors? Who are these mythical active investors, supposedly achieved superior alpha but cannot be tracked by any studies or reports? Please provide data to support your claim. Tax is certainly not a strawman. Investors consume after tax return. When investors are fighting for extra basis point of return, you want us to ignore basically up to 20% of return? It does not matter whether you mentioned it or not, it is the part of the discussion in this thread. Take away asset classes, yes it is silly to assume no one has an ability to pick managers and stocks. Please support any data for your claim, I have provided mine. 1. Yes. I am not just saying "average" but "every" retail investors should go passive. 2. Yes. active management by individual investors is a folly because of the reason you just cited. Support claim with any data you have. Active management by institution may achieve superior result before cost, but almost all the excess return they consume themselves, investors does not get any. Since alpha is a zero-sum game, if there are losers, even before costs, there must be winners. Who are the winners? The winners are institutional investors, such as actively managed mutual funds. The research shows that on a gross return basis, active fund managers are able to generate alpha, exploiting the bad behavior of individual investors. For example, Jonathan Berk and Jules van Binsbergen, authors of the 2013 study “Measuring Skill in the Mutual Fund Industry,” found that the average mutual fund has added value by extracting about $ 2 million per year from financial markets, and that the value added is persistent for as long as 10 years. Berk and van Binsbergen concluded: “It is hard to reconcile their findings with anything other than the existence of money management skill. ” The 2000 study, “Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transactions Costs, and Expenses” by Russ Wermers, provides further evidence of stock-picking skill. Wermers found that on a risk-adjusted basis, the stocks active managers selected outperformed their benchmark by 0.7 percent per year. However, investors earn net, not gross, returns. The research finds that their total expenses— not just the fund’s expense ratio, but trading costs as well— more than eroded the benefits derived from their stock-selection skills, leaving investors with net negative alphas. Source: Swedroe, Larry E; Berkin, Andrew L. The Incredible Shrinking Alpha: And What You Can Do to Escape Its Clutches .
How about: BRK.A? Hedge Fund Market Wizards? http://www.wiley.com/WileyCDA/WileyTitle/productCd-1118283619.html
Basic two ways to evaluate any security is standard deviation and beta. But as you aware there are other ways to measure risk especially for mutual funds. * Risk adjusted alpha = (fund return - index return)/beta * active risk or tracking error as one of the poster mentioned above is difference of standard deviation between and fund's return and benchmark return * Information Ratio = Excess return / Tracking error * most common Sharpe ratio = Excess return over t-bill/tracking error I do not claim to be any expert, but for me volatility of returns is risk. It does not mean one should not shun risk. To be clear main aim is to reduce overall portfolio risk, but it is better to have components within the portfolio as volatile as possible. Reason for this is if your rebalance this portfolio, their will be rebalancing bonus which comes thru' selling high and buying low. I am not sure what you mean by affect mean return. But there is size premium (or factor few people call) about 3% for small cap stocks. In my opinion it is futile to beat it. As i mentioned, my preference is to accept the market return as it is and try to leverage it. Lot of time, energy and cost spent on beating it to achieve few basis point extra return. Instead of leveraging and diversification provides much bang for the buck.