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Comment by ddeck | Hacker News Reader

The entire asset management industry is a candidate for the bullshit job title. Within the equity asset class for example, aggregate performance is worse than passive investments and there is ample evidence that substantially all managers are unable to actually provide the service they are selling.

As an industry, it effectively taxes savings and distributes those taxes to the employees within the industry, sometimes as eye watering salaries and bonuses.

One may argue that the consumer is free to choose not to consume the service, but the reality is that most countries have mandated retirement savings mechanisms that efficiently funnel employee pensions and savings into the industry.

[1] http://www.umass.edu/preferen/You%20Must%20Read%20This/Picki...

[2] http://web.stanford.edu/~wfsharpe/art/active/active.htm

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That's a very interesting assertion. Couldn't it be that the active asset management industry is underperforming because there is so much competition that any alpha is nullified by cost of research and operation?

It could be that if everyone only invested passively, then there would be untapped alpha in the market which would lead to greater profits to the active asset management industry. This in turn would lead to more active management firms leading to an equilibrium where alpha is nullified.

Not an expert on economics. Just saying this form of bullshit may be vital to the system.

>"[..]but the reality is that most countries have mandated retirement savings mechanisms that efficiently funnel employee pensions and savings into the industry."

I wouldn't quite use the word mandated. But at least in the case where I am currently, South Africa, all sorts of financial instruments such as the ones you mention, are heavily "pushed" by government via various means. I.e. tax-exemption benefits, incentivizing insurance/financial brokers into pushing by making it a regulated license industry (protected status), and plain out funding the industry by using it to give government employees plushy "retirement packages" in the form of these instruments.

It's such a sad state of affairs (at least in this small subset of discussion). I've actually been wondering about it quite a lot recently. While I watch perfectly smart, educated individuals being effectively "tricked" into putting huge amounts of their monthly earnings to save up for "retirement" because it's "tax-exempt". Ironically, all those savings get taxed as "income" anyways when they withdraw from it in retirement. Wait, it's not funny.

Meanwhile, whilst they are busy being coaxed into this scheme due to "tax exemption" benefits, they're paying mounds of interest on car and home loans that they could pay off ridiculously sooner. Those loans that are constantly funding financial institutions? You could argue that it's another way in which the government is "funneling" capital into it.

</rant>

A critical assumption in that view is that the returns on actively and passively managed funds are independent. Are they, or are the passive funds freeriding on the work of the active funds?

They are certainly not independent given they are allocating between the same underlying investments, but I fail to see how they are freeriding given the data.

Many have looked at this and presented the data far more eloquently than I could:

https://hbr.org/2013/05/just-how-useless-is-the-asset/

http://www.umass.edu/preferen/You%20Must%20Read%20This/Malki...

Active funds incorporate new data in the market thereby making it more efficient, which benefits passive funds, no?

Wow, I'm surprised to see a comment so critical of Venture Capitalists on HN. But I guess it's fair: The VC industry as a whole badly underperforms the S&P index on a risk-adjusted basis. Or aren't those the asset managers you were talking about?

Well VC is a very small part of the asset management industry and you are correct that that's not really the area I was referring to.

The bulk of asset management is in listed equities and government/corporate bonds and this is what I was primarily referring to.

But VC's are investing in very high risk investments not the sort of mature companies that big generalist funds/trusts invest in.

VCs don't exist because it's the most profitable way to use that money. VCs exist because certain people think it's a fun game to play.

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