First, I don't really understand why performance of distressed debt or trend following should be compared with S&P500. It's apples and oranges. Second, using that index does not really avoid the problem similar to closet indexers because lots of those funds are giving you beta under guise of alpha. Iirc there was an article or a study that long/short equity funds as a group are in fact long funds. Overlaying S&P with a flawed index on a chart does not really substitute for a proper study that would get rid of closet indexers/beta-providers and also try to incorporate the qualitative aspects like process. Finally, there will certainly be someone with a better methodology than the author of such study.
In your previous post, you mentioned investors with enough resources and with proper research some how can achieve superior returns. Well Hedge fund investors are those kind of investors. Those are the type of investors, who are supposed to get away from closet indexers in the retail space and now you reject hedge fund index and call them "closet indexers and beta providers"?
That chart did not come from any study. It came from hedge fund index provider itself and it is in the front page once you log in.
https://lab.credit-suisse.com/#/en/home
They compare their index to SPX and Hedge fund index does not just include distress debt and trend following.
Just like SPX include many sectors, hedge fund includes many strategies. Here are the components of that index
What is your definition of active investors? Who are these mythical active investors, supposedly achieved superior alpha but cannot be tracked by any studies or reports? Please provide data to support your claim.
The tax issue is a strawman. I never said every ET member in the US should disregard taxation of short-term profits and try intraday trading. I said that it's silly to assume that no one has an ability to pick managers, asset classes or stocks.
Tax is certainly not a strawman. Investors consume after tax return. When investors are fighting for extra basis point of return, you want us to ignore basically up to 20% of return? It does not matter whether you mentioned it or not, it is the part of the discussion in this thread.
Take away asset classes, yes it is silly to assume no one has an ability to pick managers and stocks. Please support any data for your claim, I have provided mine.
If you say that an average retail investor should go passive because they don't have knowledge/time/assets/willingness/access/edge, then I'll agree with you. If you say that active management as a concept is a folly because one cannot beat the benchmark consistently other than by luck or such manager cannot be identified, then I'll disagree with you.
1. Yes. I am not just saying "average" but "every" retail investors should go passive.
2. Yes. active management by individual investors is a folly because of the reason you just cited. Support claim with any data you have.
Active management by institution may achieve superior result before cost, but almost all the excess return they consume themselves, investors does not get any.
Since alpha is a zero-sum game, if there are losers, even before costs, there must be winners. Who are the winners? The winners are institutional investors, such as actively managed mutual funds. The research shows that on a gross return basis, active fund managers are able to generate alpha, exploiting the bad behavior of individual investors. For example, Jonathan Berk and Jules van Binsbergen, authors of the 2013 study “Measuring Skill in the Mutual Fund Industry,” found that the average mutual fund has added value by extracting about $ 2 million per year from financial markets, and that the value added is persistent for as long as 10 years. Berk and van Binsbergen concluded: “It is hard to reconcile their findings with anything other than the existence of money management skill.
” The 2000 study, “Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transactions Costs, and Expenses” by Russ Wermers, provides further evidence of stock-picking skill. Wermers found that on a risk-adjusted basis, the stocks active managers selected outperformed their benchmark by 0.7 percent per year. However, investors earn net, not gross, returns. The research finds that their total expenses— not just the fund’s expense ratio, but trading costs as well— more than eroded the benefits derived from their stock-selection skills, leaving investors with net negative alphas.
Source: Swedroe, Larry E; Berkin, Andrew L. The Incredible Shrinking Alpha: And What You Can Do to Escape Its Clutches .
