4 ms·

I suppose a smart-ass response is "in the Bahamas, because we make them so much money". In any case, excellent analogy there to illustrate the random walk. No

by arjie 10y ago

I suppose a smart-ass response is "in the Bahamas, because we make them so much money". In any case, excellent analogy there to illustrate the random walk. Now, the article alludes to the idea that successful active management is a fiction. If this is the case, what's the currently most plausible hypothesis for why active fund management is so attractive? Somehow fund managers have sold themselves as Gene Sarazens, and supposedly there is evidence that they are not. And the evidence is strong. And yet these not-Genes successfully sell their services. How?

dsacco 10y ago
People seek out active managers because it's not a fiction that there are successful ones. They're simply difficult to identify before they become celebrities, at which point they're too expensive for all except institutional investors. Unfortunately, the relative few spur the hunt for the supermajority, who are mediocre. Keep in mind two other facts. First, this piece is published by the Index Fund Advisors, which implies a fundamental bias against active management (and that's not necessarily bad! Index funds are almost inarguably superior for almost everyone). Second, Eugene Fama's Efficient Market Hypothesis does not have widespread support in its strong form. In the years since his thesis, even Fama has walked back to a more reasonable position that allows for people to beat the market. The weaker form of the hypothesis allows for successful managers, just comparatively few of them.
- ryandrake 10y ago
  There are successful coin flippers too, who can flip heads 10 times in a row! Just have to get a room full of few thousand coin flippers and when you find the guy who does 10 in a row, ask him how he became so skilled.
  - dsacco 10y ago
    The tired coin flipping trope is just dismissive and does nothing to seriously argue against the possibility of people consistently beating the market. Even Warren Buffett, the champion of index funds, has argued against the coin flipping analogy. I've had this discussion several times before, so in lieu of rehashing it I'll just put this here: https://news.ycombinator.com/item?id=13451161#13452516 https://news.ycombinator.com/item?id=13451161#13452516 Empirically map your coin flipping analogy to a probabilistic model of the likelihood of beating the market and then we can reasonably talk about it. There are real arguments to be made, but saying "coin flipping!" does nothing to seriously engage with the debate.
    - SirLJ 10y ago
      The problem with the big funds are that they remaking money from their fees... e.g they do not have incentive to look for alpha... best strategy for them is preserve capital and live off the 2% fees
      - yoasif_ 10y ago
        You'd have a point if the competition charged fees on a percentage of "alpha" generated -- but they don't, they largely charge more fees than index funds, irrespective of whether they outperform.
lisper 10y ago
Aspirations often trump facts in many aspects of life, not just economics.
wtvanhest 10y ago
There are so many complex things at play here, but... 1) there are people who work for major institutional investors (think pension funds) who are paid very well to pick managers. If they just pick beta funds, it is hard for them to justify their salaries. 2) not all market participants are interested in 'beating markets'. Many are interested in matching the liabilities to their assets or accomplishing another goal. 3) I believe that there are some managers that are much better than other managers for at least short times. I do not believr i know how to pick them, but the idea that it may be possible may make this bet worth it. 4) If there are good managers, the investment world is winner take all and they will accumulate a lot of assets.
- jfim 10y ago
  > 3) I believe that there are some managers that are much better than other managers for at least short times. There are always managers who outperform the market, if you look backwards. The problem is whether they're able to repeat their performance moving forwards or if it was due to pure luck.
  - wtvanhest 10y ago
    Right. So the question is, can it be predicted. Im not confident I can, but there may be people that know more than I.
    - SirLJ 10y ago
      I think you should look into the trend following concept, I do believe trends can be predicted and with proper risk management money can be made...
      - wtvanhest 10y ago
        There are people who believe that "technical analysis" works. I believe in semi efficient markets and do not believe technical analysis works, especially at scale. I think that quantitative analysis can work in rare casis and generate alpha, but i do not believe that i can predict those cases or generate that alpha myself.
nerdponx 10y ago
Active management for maximizing returns is a fiction. Active management for controlling risk and volatility is not.
- dsacco 10y ago
  This is not true. Mutual funds and most hedge funds are designed for capital returns these days, and few of them optimize for capital preservation, despite the name. Beyond that, a minority of funds are consistently successful at beating the market.
mjfl 10y ago
Your post reminds me of Frederick T. Gates, manager of the Rockefeller fortune, who once sold Lake Superior Consolidated Iron Mines to US Steel for 55 million dollars (1.5 billion with inflation) in profit for the Rockefeller family. I guess his response would be "my client considers yachts symbols of decadence, instead he owns several houses in downtown Manhatten, upstate, in the Berkshires, and in Florida."
woodandsteel 10y ago
The larger perspective is that the human brain is amazingly well designed for the sort of specific tasks involved in living as a hunter-gatherer, but these tasks are quite different from what is involved in choosing among investment options, and so most people tend to make bad decisions. The other side of this is that about 1% of the population are sociopaths who make it through life threatening or fooling other people, and many of the the really bright ones realize they can make the most money through trickery in finance.
Spooky23 10y ago
Because they are good at selling. It's difficult to distinguish the talent from the schmucks, because it's easy to take credit for broad economic growth and easy to blame the world for failure.

by arjie 10y ago

dsacco 10y ago

People seek out active managers because it's not a fiction that there are successful ones. They're simply difficult to identify before they become celebrities, at which point they're too expensive for all except institutional investors. Unfortunately, the relative few spur the hunt for the supermajority, who are mediocre. Keep in mind two other facts. First, this piece is published by the Index Fund Advisors, which implies a fundamental bias against active management (and that's not necessarily bad! Index funds are almost inarguably superior for almost everyone). Second, Eugene Fama's Efficient Market Hypothesis does not have widespread support in its strong form. In the years since his thesis, even Fama has walked back to a more reasonable position that allows for people to beat the market. The weaker form of the hypothesis allows for successful managers, just comparatively few of them.

ryandrake 10y ago
There are successful coin flippers too, who can flip heads 10 times in a row! Just have to get a room full of few thousand coin flippers and when you find the guy who does 10 in a row, ask him how he became so skilled.
- dsacco 10y ago
  The tired coin flipping trope is just dismissive and does nothing to seriously argue against the possibility of people consistently beating the market. Even Warren Buffett, the champion of index funds, has argued against the coin flipping analogy. I've had this discussion several times before, so in lieu of rehashing it I'll just put this here: https://news.ycombinator.com/item?id=13451161#13452516 https://news.ycombinator.com/item?id=13451161#13452516 Empirically map your coin flipping analogy to a probabilistic model of the likelihood of beating the market and then we can reasonably talk about it. There are real arguments to be made, but saying "coin flipping!" does nothing to seriously engage with the debate.
  - SirLJ 10y ago
    The problem with the big funds are that they remaking money from their fees... e.g they do not have incentive to look for alpha... best strategy for them is preserve capital and live off the 2% fees
    - yoasif_ 10y ago
      You'd have a point if the competition charged fees on a percentage of "alpha" generated -- but they don't, they largely charge more fees than index funds, irrespective of whether they outperform.

lisper 10y ago

Aspirations often trump facts in many aspects of life, not just economics.

wtvanhest 10y ago

There are so many complex things at play here, but... 1) there are people who work for major institutional investors (think pension funds) who are paid very well to pick managers. If they just pick beta funds, it is hard for them to justify their salaries. 2) not all market participants are interested in 'beating markets'. Many are interested in matching the liabilities to their assets or accomplishing another goal. 3) I believe that there are some managers that are much better than other managers for at least short times. I do not believr i know how to pick them, but the idea that it may be possible may make this bet worth it. 4) If there are good managers, the investment world is winner take all and they will accumulate a lot of assets.

jfim 10y ago
> 3) I believe that there are some managers that are much better than other managers for at least short times. There are always managers who outperform the market, if you look backwards. The problem is whether they're able to repeat their performance moving forwards or if it was due to pure luck.
- wtvanhest 10y ago
  Right. So the question is, can it be predicted. Im not confident I can, but there may be people that know more than I.
  - SirLJ 10y ago
    I think you should look into the trend following concept, I do believe trends can be predicted and with proper risk management money can be made...
    - wtvanhest 10y ago
      There are people who believe that "technical analysis" works. I believe in semi efficient markets and do not believe technical analysis works, especially at scale. I think that quantitative analysis can work in rare casis and generate alpha, but i do not believe that i can predict those cases or generate that alpha myself.

nerdponx 10y ago

Active management for maximizing returns is a fiction. Active management for controlling risk and volatility is not.

dsacco 10y ago
This is not true. Mutual funds and most hedge funds are designed for capital returns these days, and few of them optimize for capital preservation, despite the name. Beyond that, a minority of funds are consistently successful at beating the market.

mjfl 10y ago

Your post reminds me of Frederick T. Gates, manager of the Rockefeller fortune, who once sold Lake Superior Consolidated Iron Mines to US Steel for 55 million dollars (1.5 billion with inflation) in profit for the Rockefeller family. I guess his response would be "my client considers yachts symbols of decadence, instead he owns several houses in downtown Manhatten, upstate, in the Berkshires, and in Florida."

woodandsteel 10y ago

The larger perspective is that the human brain is amazingly well designed for the sort of specific tasks involved in living as a hunter-gatherer, but these tasks are quite different from what is involved in choosing among investment options, and so most people tend to make bad decisions. The other side of this is that about 1% of the population are sociopaths who make it through life threatening or fooling other people, and many of the the really bright ones realize they can make the most money through trickery in finance.

Spooky23 10y ago

Because they are good at selling. It's difficult to distinguish the talent from the schmucks, because it's easy to take credit for broad economic growth and easy to blame the world for failure.