How do actively managed funds beat the index despite being closely correlated to it?

N

nxt7

Take this for example...even though the actively managed fund is beating the corresponding index by over 20%, surprisingly enough its graph strongly correlates with the index itself in every twist and turn... How are such inflated returns even possible when the index fund and the actively managed fund have different stock selections and allocations?

https://imgur.com/kM5HEG8
 
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nxt7 said:
Seems obvious but still, how does that explain when the index fund and the actively managed fund have different stock selections and allocations?
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Uh.. You said it yourself,
That these returns look highly correlated.
For me it's a sign that there ain't much a difference.
Obviously their portfolios are quite similar. No ?
 
It's not leverage, in the conventional sense of the word. The index is the benchmark, which is why there's broad correlation. However, the fund also seems like it's been able to outperform its benchmark. Whether this is due to manager skill, extra factor risk or otherwise is unclear.

One thing you may want to confirm is that what you're comparing are total returns.
 
Correlation of two sets of equities may be +.9 or better.
In one set the "managed" equity may lag the performance of the index equity.
In the 2nd set the "managed" equity may beat the index component.
So, to make this work:
Select 50 of the highest atr Nasdaq stocks with +.9 corr with QQQ.
I would bet they will outperform in the direction of trend over time and the last
8 years should show that. They will also be monkey hammerred in a downturn or
Bear market. So, to me anyway, all this means is catching the drift(lucky) with a little leverage.
 
They could be tracking the index and then doing other things to get some extra juice out of their returns, buying/selling options, leverage, etc.
 
They are probably taking advantage of sector rotations with a portion of the assets as well. Say they are 70% long overall the benchmark and using 30% of assets to take advantage of rotations in Finance, Biotech, Mining etc. If they are right on the rotations 60% of the time they would come out way ahead.
 
When trading an Index, you are trading all stock within the Index, including the stocks that are losing money. But let's say you are only going to be trading stocks that pay at least 4% dividends and are optionable, the list gets much shorter.

http://finviz.com/screener.ashx?v=1...o4,geo_usa,idx_sp500,sh_opt_option&o=-perfytd

You keep an eye on the stocks that are not doing well, and when they turn around, you have stocks paying 4% and can hedge new Buys.

WildBill said:
They are probably taking advantage of sector rotations with a portion of the assets as well. Say they are 70% long overall the benchmark and using 30% of assets to take advantage of rotations in Finance, Biotech, Mining etc. If they are right on the rotations 60% of the time they would come out way ahead.
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Very right.
 
WildBill said:
They are probably taking advantage of sector rotations with a portion of the assets as well. Say they are 70% long overall the benchmark and using 30% of assets to take advantage of rotations in Finance, Biotech, Mining etc. If they are right on the rotations 60% of the time they would come out way ahead.
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Yeah, sounds like true, I believe that's what actually happens there.
 
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