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One nitpick. A huge number of mutual funds outperform the market. Something like 40 percent of them, which would be in the hundreds to thousands. It's the avera

One nitpick. A huge number of mutual funds outperform the market. Something like 40 percent of them, which would be in the hundreds to thousands. It's the average over all of them (after accounting for survivorship bias) that underperforms. I otherwise wholeheartedly agree with everything you've written. Self-proclaimed expertise should be viewed with a very healthy scepticism, and the burden of proof isn't on you to show why they're wrong, it's on them to show why they're right without resorting to an argument from authority.

Jeff_Brown 6y ago
In a week? In a year? Over their entire existences? And by how much? Economic theory suggests that over a long window nobody beats it by very much.
- hntrader 6y ago
  The fact is that many (hundreds) do beat benchmark - over years and decades - which is sufficient data to disprove the original assertion that I was contesting. "By how much?" - not relevant to the claim I was disputing. The reasons there are many outperformers are few fold. Firstly, failing funds often close up shop and start anew, which artificially inflates the N success metric. The average number of hedge funds that a current manager has run is 2, since they've closed one failure on average. Second, economic theory is a limiting condition, it's still remarkably easy to be lucky over a 5 year period given the low frequency nature of trades that many of these funds perform. It's not like a chronic gambler where the law of large numbers kicks in after two weeks. Third, professional fund managers still do have edge over all other parts of the market (this has been shown in academic research), it's just that this edge is less than their fees, but it tilts the small sample statistics towards showing a large N successes compared to what we'd expect if they were trading randomly.
- sudosysgen 6y ago
  That economic theory is unfalsifiable. People do beat the markets for their entire lives.
  - hntrader 6y ago
    They're actually misunderstanding orthodox economic theory. EMH and CAPM doesn't say that it's impossible to run an outperforming mutual fund over many years. All it says is that it's impossible to do so in expectation. Note that this is a statistical property pertaining to the law of large numbers. Nowhere in economic theory does it preclude a number of lucky outperformers, which is consistent with what we observe in reality (ie that there's a huge number of outperforming funds, and an even larger number of underperforming ones). A finance professor would say "yes, there's hundreds of outperforming funds out there, likely some combination of luck and survivorship bias."
    - sudosysgen 6y ago
      I am aware of that definition. It is also unfalsifiable. The only way to measure that is to take the average, but by definition for every market winner there is a market loser, so on average of course the return of the market will be.. . The average return of the market. The efficient market hypothesis and the idea of efficient markets in general is not supported by evidence.
      - Dylan16807 6y ago
        The number of consistently lucky participants drops exponentially over time. For a certain level of luck, and a certain threshold of proof, you can prove whether or not there are participants that know how to beat the market.
        hntrader 6y ago
        In principle yes but in practice it's very difficult to postulate an accurate null hypothesis sampling distribution from which trades are drawn. In a roulette game, each outcome is drawn from the same, well understood distribution, so we can easily calculate the probability that a sequence of outcomes is observed when the null hypothesis distribution applies. In trading this is much harder, given the null hypothesis distribution is unknown and hard to estimate, and trades aren't i.i.d. since regimes come and go and therefore the luck of a specific style can be autocorrelated over a number of years. Trades are also correlated in the cross section through betas. I'm going to go ahead and say that it's an impossible task if we're dealing with 10-20 year timeframes and the fund had a low frequency style. It's just way too easy to be lucky over a course of multiple years. All you really need is 1 lucky call combined with index tracking on the remaining capital to outperform ("overweight AMZN").

Jeff_Brown 6y ago

In a week? In a year? Over their entire existences? And by how much? Economic theory suggests that over a long window nobody beats it by very much.

hntrader 6y ago
The fact is that many (hundreds) do beat benchmark - over years and decades - which is sufficient data to disprove the original assertion that I was contesting. "By how much?" - not relevant to the claim I was disputing. The reasons there are many outperformers are few fold. Firstly, failing funds often close up shop and start anew, which artificially inflates the N success metric. The average number of hedge funds that a current manager has run is 2, since they've closed one failure on average. Second, economic theory is a limiting condition, it's still remarkably easy to be lucky over a 5 year period given the low frequency nature of trades that many of these funds perform. It's not like a chronic gambler where the law of large numbers kicks in after two weeks. Third, professional fund managers still do have edge over all other parts of the market (this has been shown in academic research), it's just that this edge is less than their fees, but it tilts the small sample statistics towards showing a large N successes compared to what we'd expect if they were trading randomly.
sudosysgen 6y ago
That economic theory is unfalsifiable. People do beat the markets for their entire lives.
- hntrader 6y ago
  They're actually misunderstanding orthodox economic theory. EMH and CAPM doesn't say that it's impossible to run an outperforming mutual fund over many years. All it says is that it's impossible to do so in expectation. Note that this is a statistical property pertaining to the law of large numbers. Nowhere in economic theory does it preclude a number of lucky outperformers, which is consistent with what we observe in reality (ie that there's a huge number of outperforming funds, and an even larger number of underperforming ones). A finance professor would say "yes, there's hundreds of outperforming funds out there, likely some combination of luck and survivorship bias."
  - sudosysgen 6y ago
    I am aware of that definition. It is also unfalsifiable. The only way to measure that is to take the average, but by definition for every market winner there is a market loser, so on average of course the return of the market will be.. . The average return of the market. The efficient market hypothesis and the idea of efficient markets in general is not supported by evidence.
    - Dylan16807 6y ago
      The number of consistently lucky participants drops exponentially over time. For a certain level of luck, and a certain threshold of proof, you can prove whether or not there are participants that know how to beat the market.
      - hntrader 6y ago
        In principle yes but in practice it's very difficult to postulate an accurate null hypothesis sampling distribution from which trades are drawn. In a roulette game, each outcome is drawn from the same, well understood distribution, so we can easily calculate the probability that a sequence of outcomes is observed when the null hypothesis distribution applies. In trading this is much harder, given the null hypothesis distribution is unknown and hard to estimate, and trades aren't i.i.d. since regimes come and go and therefore the luck of a specific style can be autocorrelated over a number of years. Trades are also correlated in the cross section through betas. I'm going to go ahead and say that it's an impossible task if we're dealing with 10-20 year timeframes and the fund had a low frequency style. It's just way too easy to be lucky over a course of multiple years. All you really need is 1 lucky call combined with index tracking on the remaining capital to outperform ("overweight AMZN").