[ QUOTE ]
Regarding fund managers...This is way off topic but there is a lot of evidence that they really don't contribute anything.
[/ QUOTE ]
Totally Wrong. Some don't provide alpha. But many do.
[ QUOTE ]
They provide superior returns but only if you fail to adjust for increased risk,
[/ QUOTE ]
Wrong, see below comments and research papers.
[ QUOTE ]
even if they were still ripping off their clients. As it is I really don't think they do anything except add a little volatility.
[/ QUOTE ]
This is hilariously offbase, ignorant and biased.
[ QUOTE ]
(There are some outlier funds that really do seem to provide abnormal risk-adjusted returns, to be fair.)
[/ QUOTE ]
Truth comes out!
[ QUOTE ]
BTW - My main source for this is a recent New Yorker article,
[/ QUOTE ]
Ah, yes, the expert trade mag on all things financial. That article showed a fundamental misunderstanding of even certain fin'l definitions and terms, and was not written by someone familiar with the industry at all.
[ QUOTE ]
but people in academia and other areas of the financial world have suspected this for years.
[/ QUOTE ]
Well, they've proven many managers consistently show markt-beating returns, if that's what you mean, time and time again:
Ibbotson and Chen's academic paper on the topic of Hedge Funds--http://papers.ssrn.com/sol3/papers.cfm?abstract_id=733264
using Ibbotson's data for equity L/S funds only [Jan 1995- April 2006:
'L/S Hedge Funds create a net alpha of 5.41 per year - that is net, and overall return of 13.10%.
All results are for dead + live funds, and do NOT include backfill data/bias. Alpha per HF strategy:
Equity Neutral +1.94%
Fixed Inc Arb +3.91%
L/S Equity +5.41%.'
more tl/dr below ---
Mutual Funds:
Do Winners Repeat with Style?
ROGER G. IBBOTSON , AMITA K. PATEL
February 2002
http://papers.ssrn.com/sol3/papers.c...ract_id=292866
'Several studies have found that considerable persistence exists in mutual fund performance. We study this phenomenon in fund managers who achieve superior performance, after adjusting for the investment style of the fund. Our data of domestic equity mutual funds indicates that winning funds do repeat good performance. Style-adjusted alphas are evaluated on both an absolute and relative basis.'
Now, those pounding the table in favor of indexing via BGI/SSgA/VGuard have a point: It is a very cheap way to access Beta exposure – which is simply exposure to the index you are trying to replicate. This should be very low cost – you may have heard of some funds being called 'index funds in disguise,' that is they charge you 1.25% and own 90% of the stocks in the SP500 – that is truly a waste of your money.
By definition, Alpha – or market outperformance – has to be a net Zero for all investors, actually slightly lower including fees/trading costs – just like a poker game. Simply investing in stocks is a positive sum game, however.
Indexers will tell you that since a majority of mutual funds underperform 'the market' – not 90% as they claim, but many – that this proves you should just index. Burton Malkiel says that mutual funds regularly underperform by 2% on an annual basis. Since the average mutual fund costs about 1.3%, that means that most funds are losing 70bps per year in alpha. Index funds are losing 15-20bps per year in alpha.
However, this also means that other players in the market, by definition, are generating significantly positive alpha. After all, if 70% of funds have negative alpha the other 30% are gaining all of that alpha, plus the alpha opportunities ignored by the enormous cap-weighted index funds like the SP500 or Total Market Indexes. [Siegel and others have invented value-weighted indexes to take alpha from cap-weighted ones.] QED.
In less than 3 years from 2000-2002, the SPX lost 45%. Over the entire period, it lost 40%. Beta/Index investors got the relative return they were looking for!
If you can identify superior managers, something that may not be easy or trivial to do [but many sites like MStar, Lipper, etc can give you the foundation] you can certainly do better than the market AND with less volatility, given time and a modicum of work and intelligence.
Many investors have demonstrated the ability to beat the market over statistically significant periods of time with superior performance – Warren Buffett would be the most famous example, John Neff's Windsor mutual fund crushed the market over 32+ years, beating the SP500/SPX by 3.1% annually, after fees. $100k turned into $2.5mm in 'the large-cap market' but $6.1mm in Windsor.
James Simons has grossed 50% annually for the last 20 years [longer, if you use his personal results prior to managing outside money.] Steve Cohen is coming up on 15 years of 50% returns.
Several firms have used models and bond agency ratings to predict defaults to evaluate the equity performance of various 'risk' classes. Generally speaking, they find distressed stocks have abnormally low returns, inconsistent with return/risk assumptions. These firms have higher volatility, betas, and market cap-factors than stocks with a low risk of failure.
Studies have shown that stocks with low risk factors such as lower beta, leverage, higher profits and dividends outperform the market, consistent with the research on distressed firms. O'Shaughnessy shows similar results.
Others have tried to measure 'risk' as uncertainty, and failed. Researches have shown it is not positively related to equity returns, and may even be negatively correlated.
Also see:
The volatility effect: lower risk without lower return
David C. Blitz∗
Deputy Head of Quantitative Strategies at
Robeco Asset Management in the Netherlands
Pim van Vliet, PhD
Senior Researcher Quantitative Strategies at
Robeco Asset Management in the Netherlands
Abstract
We present empirical evidence that stocks with low volatility earn high
risk-adjusted returns. The annual alpha spread of global low versus high
volatility decile portfolios amounts to 12% over the 1986-2006 period.
We also observe this volatility effect within the US, European and Japanese markets in isolation. Furthermore, we find that the volatility effect cannot be explained by other well-known effects such as value and size. Our results indicate that equity investors overpay for risky stocks. Possible explanations for this phenomenon include (i) leverage restrictions, (ii) inefficient two-step investment processes, and (iii) behavioral biases of private investors. In order to exploit the volatility effect in practice we argue that investors should include low risk stocks as a separate asset class in the strategic asset allocation phase of their investment process.
http://papers.ssrn.com/sol3/papers.c...ract_id=980865