Hi, this is probably a newbie questions, but Im curious as to what you people think are plausible answers. So far, from what I understand to gain an "edge" in the markets, you have to exploit a certain inefficiency. Generally people don't like to tell others about these, because the more people that know about them, the more will use them, thus making it less and less effective. Someone on ET said they read it takes about 3 years for a market inefficiency to have severely diminished returns. So, you have people in the markets who have INCREDBLE gains. Im not talking about 12% a year mutal funds, or even some hedge funds, but like 10% a week, or even in the hundreds of percentage points a year. Obviously with certain markets trading with the billions of dollars in a mutal fund will raise filling issues (equities is what im thinking), move the market, etc etc, but what about gigantic markets that eat a billion dollars for breakfast like FOREX? This could easily handle the volume needed to trade with large mutal funds. Then there is the argument that it is more profitable to trade for oneself. This may be true, but if you get the 20% performance incentive offered by many hedge funds, it would be pretty hard to beat the raw capital gain with your own money, at least for a while.... So my question is, why are all these mutual funds performaing so poorly? because the equities market? they want to limit drawdrown SOO much, performance suffers? Then why arent hedge funds making INSANE returns? If you look at the index, and performance of these funds, it hardly seems to be worth it. Then you see the claimed returns of some posters on here (granted there is no verification), BUT if anyone ever looks at trading competitions like FXCM, trade2win, and consistently (yet simulated) programs like on collective2, and the number of other trading competitions. You can argue that getting returns like on FXCM of 700%+ a month, is not consistent, and it would be hard to tell because they only have montly trades, but if you look at longer term simulated programs, they are consistent over 36 week terms. So how come there arent any super high performing hedge funds, or decent performing mutal funds? thanks.
This is very simple.... Lets start with some of today´s real examples.... AAPL + 2.12 DELL -.05 EBAY +1.29 YHOO + 2.08 The trader may make: AAPL +4.79 DELL +1.22 EBAY +2.52 YHOO+3.21 It is possible for these stocks to not change in value for a year...but the trader may realize several times their face value.....
I apologize for leaving this out..but there are some nice moves going on here at the close... Well..Let´s say I trade 5000 share positions...and I do this 7 times per day....This would be 70,000 shares..and if the stock trades 1000000 shares per day...this would be 7% of its volume... At 5000 shares you would need high volume stocks to have assurance you would obtain the desired prices... However if you ran a hedge fund and you needed to have 1000000 shares in the portfolio...you could not employ the same trading strategy with any high level of confidence of obtaining desired prices... It is largely a size issue....This is one reason that derivatives are very popular because of their extraordinary leverage aspects...but even then cannot employ the same strategy that a short term trader could employ...
yes, i understand the size issue especially with equities. but in other markets there less of a size issue, such as FOREX. They DO have managed forex accounts, but they are nowhere near as popular as your standard mutual fund, and even the managed forex accounts i have seen have had modest gains of 20%-25% annually.
2 reasons. 1. my understanding is, mutual funds are restricted risk/drawdown wise. they are also limited to what they can invest in. 2. "traders" who work for the other guy are basically highly degreed sub-rate clock-punchers. so they reason that they are happy to draw their 2/20 fees, therefore return mediocre results. why not? I mean, 2/20 on a $10b fund you can live pretty well without having to work too hard. ah... but private traders - we can do anything - no one is over us. If we can spot it, we can trade it - no restraints. and everything we make is ours. therefore, if you are fast, as a private trader sky's the limit. GaMaL SaHaM rUaCh
Think about it from the perspective of a fund manager and fund house to understand why all funds lag the indexes and there is relatively little variance between funds in their respective asset class. The fund manager is evaluated on performance relative to whatever industry index is used. So, for a s&p 500 index fund, he is evaluated relative to the s&p 500 index. For a large cap equity fund, same idea. So, all this guy has to do to justify his existence is to buy the same stuff that everyone else has & track the index; he'll probably try to finesse it a bit to capture slightly more. He comes in above the index, life is good, money flows into the fund, and he gets more bonus. He comes in slightly below the index, well, its just a so-so year, he gets a mediocre bonus. Custys look at the numbers, not off enough to make anyone change funds due to transaction costs, loads, etc, so no real capital outflows, and he keeps his job. Now - he tries to boost his profit sky high, makes a few bad or unlucky calls, and ends up at the bottom of the list of earnings or worse, has a negative year when everyone else has had a positive one. Now everyone realizes he is incompetent, and pulls their money out of the fund and sends it elsewhere. He gets axed, and needs to start a new career. The fund house gets its expense ratio and 12-1-b fees regardless of whether the fund does well. It profits by having more money under management which will increase its revenues from fees. Any portfolio manager who screws with this arrangement by making bad decisions will be quickly downsized. When you can just follow the herd and earn size, why would you want to stick your neck out and get it axed off? That is the #1 reason why fund returns are so mediocre and clustered. Second, every fund has expenses. That ranges from the management expenses to the trading expenses. So if the S&P index performs 8% in one year, and your fund's expense ratio is 2% and the yutz spent another 0.5% in trading fees, slippage, etc. (active trader) your 'index' fund is performing a paltry 5.5% and you're going WTF. That answer your question?
The only way to beat the stock market is to exploit its inefficiences. That is, one must stay out of the market most of the time, and employ leverage wheenever an opportunity arises. Most funds may not use leverage and, therefore, must stay almost 100% invested. Not suprisingly, the funds' performance approximates that of the market's, minus expenses.
Ok, although good insights, I'm still having a hard time buying these factors play into the mutual fund industry as WELL as the hedge fund. industry. I mean, these guys are there to make money just like the rest of us, correct? Guys that start and manage their own hedge funds dont do it out of the goodness of their heart fo they? They want to make some money, and although it is an assumption, I would imagine it is safe to say they want to make as MUCH money, as FAST as possible. Yes of course they want to limit risk/draw down. But its not like they don't have financial incentive to make more money. This just doesnt jive well with natural selection/market efficieny - Someone makes a fund that blows the rest out of the water, and everyone will switch to him, thus forcing the rest to up the ante. Isnt this how business works!? I mean, not 100% of managers can think this way, unless you believe it is an industry conspiracy. I would tend to think there are more technical issues/regulations preventing higher returns than LACK of trying/desire. If you look at the disparity between annualize fund returns and private trader returns in the competitions, were talking 12% annual VS HUNDREDS of percentage points. Im sure there are at least a few people out there who would love to start a fund, get insane returns for a few years, take the 20% off the top as well as trade your own money, and then retire a gazillionaire in 3 years. Something just doesnt add up with all of this....