As always when articles like this come up, I want to issue the usual reminder to HN to beware of what pg called "submarine stories" (http://paulgraham.com/submarine.html). There are a lot of people who stand to lose a lot of money in fees if "just park it in index funds" becomes more popular advice than it is already. Not to say the analysis above is wrong, but just keep in mind (especially at the WSJ) that it may not be coming from sources with your best interest in mind.
"A report this past week from investment firm Sanford C. Bernstein, titled “The Silent Road to Serfdom: Why Passive Investing Is Worse than Marxism,” warned that..."
It would be funny if it wasn't so incredibly blatant.
Funny enough, index funds outperform hedge funds, etc, however you can outperform the indices by buying stock at 3:00-3:30pm and selling at 4:00pm every day, because that's when many funds vest, and when most of the daily volume occurs. It's a horrible irony. The "3:30 Ramp" is so well known that there's a Twitter parody account followed by huge swaths of "Finance Twitter."
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...
>> Funny enough, index funds outperform hedge funds, etc
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.
It's not at all meaningless, because it is rational to use past performance as a predictor of future performance.
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.
>> it is rational to use past performance as a predictor of future performance
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" :)
The problem with managed funds is that the whole fund market is completely skewed by survivorship bias. Despite all the warnings not to do it, people do value funds based on past performance, and because they do that, fund managers eliminate funds with bad past performance, so the only funds you'll ever see in the market are ones with good past performance, but there's still absolutelyzero evidence that any of those funds will perform well in the future, because the actual performance is indistinguishable from random chance.
>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.
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?
The median index fund easily beats the median hedge fund after accounting for fees on both.
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.
Why not choose the 3 or 4 that happened to perform well and buy a full-page ad featuring them in Wall Street Journal, Money and Kiplinger's, the way every other fund company had done?
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.
They're generally paid both. They often charge "two and twenty" meaning 2% yearly of the assets under management and 20% of the profit. (Of course they don't absorb 20% of the losses in a bad year)
If you trade with your own (possibly leveraged) funds, sure. If you're trading with other people's money and rely more on asset management fees than profit-sharing, then your personal expected profits fall when index funds become more popular.
However, running a consumer-facing actively managed fund and taking a percentage fee becomes less profitable if demand shifts from that product to index funds, because there is less money to take a percentage fee out of.
According to the wiki article on the subject and as outlined by Marr, the answer to most headlines questions are in the negative. Most people will interpret them in the negative. It may be that the set-up is for people to _consider_ the positive, while answering in the negative.
Great point, I never had a word for it (thanks for the link) but I've felt this whenever reading the high-level economic stories about things like interest rates and the market slowing, etc. The cynic in me just assumes that whatever the author is saying will fail or whatever they're likely shorting.
