It would be funny if it wasn't so incredibly blatant.
I barely know anything about trading, and nonetheless this is absolutely glorious. It's grown into a subculture that rivals any subreddit, with its own set of memes, photoshops, even animations. And to listen to the ever-bullish narrator, there's no end in sight to the ramp...
I'm weary of reading this on Hacker News. Index funds do not beat hedge funds. That statement is devoid of nuance and accuracy, and contributes to a narrative that active managers do not have a skillset or function.
Most hedge funds do not maintain performance that beats the market, but many do. This is easily verifiable.
Yes, it's easily verifiable. It's also completely meaningless without a rational way to predict which ones will be outperforming in the future.
Past performance does not necessarily indicate future performance, and it should not be the only predictor, but to dismiss a fund's history as inconsequential to its future is silly.
A fund's prior performance is a useful signal that can be rationally incorporated into a risk versus reward decision process.
I'm not dismissing it unconditionally, but I'm not going to believe it unless I see the data. What's the probability of a fund outperforming given it has outperformed the year before?
No, it isn't and all the funds explicitly warn you that you shouldn't do it.
The point is, funds perfomance is just a bad case of "survivor bias". Many funds are created, most of them tank and you never hear about them again, but few get lucky, make some remarkable return and get their 5 minutes of fame.
There is also one more problem with the "successfull" funds:
let's say that some fund manager actually has a secret strategy that works. At the begining, he or she just takes some initial money from investors and invest it in whatever the secret strategy suggests.
Unfortunately as soon as fund becomes popular, and people start putting more and more money in it the strategy gets thrown through the window. Why? because if you put your money in a fund that fund MUST use your money to buy stocks. Even if manager thinks that this is a bad time for buying.
Therefore, as soon as fund becomes popular it stops being strategy-based and becomes "bubble based" :)
On a related note, Buffet vs. Protege Partners: http://longbets.org/362/
Are you more comfortable with that statement?
Also, here's another one to ponder: It may be just as hard to pick a fund manager who will outperform his/her peers as it is to pick a stock that will outperform its peers. For this reason alone, I index almost all my money.
It's always funny/concerning when people who make money by taking advantage of others by leveraging their lack of education then start acting as though fixes to that imbalance are afronts to their earned/deserved position.
Although, when any industry changes, those that stand to lose always put up a fight. Everyone thinks everything they have is deserved or owed to them.
>Because corporations know that, says Prof. Heemskerk, coziness and complacency may arise. “If you have only long-term investors, how do you keep management on their toes?” he asks. “Where are the checks and balances when you have such large block holdings?”
The whole system depends on the fact that investors have an interest in voting for a competent board and are willing to sell their shares if the company doesn't seem to be managed well. If the actual owners of the company aren't paying attention the opportunities for self-dealing and just plain incompetence on the part of company officers multiply.
So siphoning money away to index funds does put a direct crimp on active managed fund managers' compensation.
I've always wondered why they aren't paid a percentage of profits? That would align their interests with the customers'.
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"Hedge funds as a percent of total: 1.1%"