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So there's two things I don't really understand this article. Firstly, what is the difference between you "value investing" your own money, and sticking your mo

So there's two things I don't really understand this article. Firstly, what is the difference between you "value investing" your own money, and sticking your money in a hedge fund which does "value investing" for you? Other than the fact that you're doing this in your spare time whilst the hedge fund manager is doing it full time. Surely what this article is basically saying is "89% of hedge funds underperform the index, but I think I've got a way to beat the index" when in reality, he's just taking the bad side of the bet. The second thing is, that the author points to 89% of funds underperforming the S&P500. But in that same paper, there is another shocking statistic - 97% of large cap value investing funds lagged the S&P500 Value Index. So surely, if you what you believe in is value investing, that doesn't prevent you from using a passive index, it just means you should choose the value indexes[1], not that you should suddenly put on your boldest pin stripe suit and start picking stocks. [1]: https://www.ishares.com/us/products/239728/ishares-sp-500-value-etf https://www.ishares.com/us/products/239728/ishares-sp-500-va...

belval 5y ago
1) Management fees. A fund will usually get ~1% as a management fee. That means that if their allocation strategy gives return of 5%, you will see a return of 4%. Index funds have really low fees (<0.2%) so they don't have to perform as much as an actively managed fund to give better returns. You can think of it as moving your average return up by 0.8%, that's very significant, especially when you consider that on average funds don't beat the market. 2) Correct, the article is either written by someone with a lot of time to pick stock and do due diligences or someone who convinced himself that their "gut feel" can beat the market. Either way historically those takes are not great. EDIT: One thing I didn't add. Funds still have a good reason to exist, and that is risk management. Not all financial products want to replicate the SP500 index. You don't want your retirement fund to drop ~25% during a pandemic. That's where funds will shine. They can get you the right mix of bonds, banks and natural resources to stabilize your portfolio to +-4% every year. Some index funds do offer something similar (XCNS, XBAL) but it can still be worth having something actively managed.
- bern4444 5y ago
  On top of the management fee (which typically is around 2%, they also will take a large percentage of any returns they generate on your behalf (10% - 20%). So if they earn $x of return, you only keep .8 * x. This is the typical 2 and 20 quote. Sometimes it may be 1.5 and 15 or even 1 and 10 but that's the typical range.
bluGill 5y ago
Many funds don't try to track the s&p index. For most people the index is a better benchmark and most funds are automatically wrong, but that doesn't mean the fund itself is at fault for not meeting your goals.
jacobr1 5y ago
In the first case, I agree. One can cherry pick past data and find some basket of stocks that outperforms the market. But in practice the funds that do this tend to underperform, so it seems like something that is unlikely to be successful in practice. The second point is more interesting. The author is arguing the current simple heuristic for "value indexes" is over-inclusive. He cite two specific classes of stock for this: cyclical stocks (like gun manufacturers) and those in long-term decline (like malls). If the author is right, there probably is a way to revise these indexing heuristics (still not specific stock picking). I think the smart-beta wave a few year back tried some things like this.

belval 5y ago

1) Management fees. A fund will usually get ~1% as a management fee. That means that if their allocation strategy gives return of 5%, you will see a return of 4%. Index funds have really low fees (<0.2%) so they don't have to perform as much as an actively managed fund to give better returns. You can think of it as moving your average return up by 0.8%, that's very significant, especially when you consider that on average funds don't beat the market. 2) Correct, the article is either written by someone with a lot of time to pick stock and do due diligences or someone who convinced himself that their "gut feel" can beat the market. Either way historically those takes are not great. EDIT: One thing I didn't add. Funds still have a good reason to exist, and that is risk management. Not all financial products want to replicate the SP500 index. You don't want your retirement fund to drop ~25% during a pandemic. That's where funds will shine. They can get you the right mix of bonds, banks and natural resources to stabilize your portfolio to +-4% every year. Some index funds do offer something similar (XCNS, XBAL) but it can still be worth having something actively managed.

bern4444 5y ago
On top of the management fee (which typically is around 2%, they also will take a large percentage of any returns they generate on your behalf (10% - 20%). So if they earn $x of return, you only keep .8 * x. This is the typical 2 and 20 quote. Sometimes it may be 1.5 and 15 or even 1 and 10 but that's the typical range.

bluGill 5y ago

Many funds don't try to track the s&p index. For most people the index is a better benchmark and most funds are automatically wrong, but that doesn't mean the fund itself is at fault for not meeting your goals.

jacobr1 5y ago

In the first case, I agree. One can cherry pick past data and find some basket of stocks that outperforms the market. But in practice the funds that do this tend to underperform, so it seems like something that is unlikely to be successful in practice. The second point is more interesting. The author is arguing the current simple heuristic for "value indexes" is over-inclusive. He cite two specific classes of stock for this: cyclical stocks (like gun manufacturers) and those in long-term decline (like malls). If the author is right, there probably is a way to revise these indexing heuristics (still not specific stock picking). I think the smart-beta wave a few year back tried some things like this.