why do funds perform so poorly?

[Sparohok]

Quote from Hydroblunt:

It's called dumb money.

Bullshit. Talk about dumb; I can't believe on a message board of so called "Elite Traders" nobody knows even the most basic financial economics.

malaka56 asks, in essence, why can't all institutional investors earn fantastic market beating returns. The reason is because it is impossible. For any investor to beat the market, there must be another investor underperforming the market. Institutional investors control a majority of securitized wealth, so in order to beat the market, they have to be taking money from each other. They can't all win.

The only way to consistently earn enormous market beating returns is to find a way to consistently exploit the poor investing decisions of a other people. Leverage, for example, is simply a way of increasing the number of dumb people you can bet against. Eventually, with enough success or enough leverage, even the smartest investor will run out of dumb counterparties.

It is mathematically inevitable that huge returns can only be accomplished with a small proportion of market wealth. Thus, any sufficiently successful strategy will eventually outgrow its success and end up earning boring, pedestrian, mutual fund returns.

Comparing traders in contests with real money managers is a joke.

Martin

 

[FXsKaLpEr]

Quote from malaka56:

Ok, although good insights, I'm still having a hard time buying these factors play into the mutual fund industry as WELL as the hedge fund. industry. I mean, these guys are there to make money just like the rest of us, correct? Guys that start and manage their own hedge funds dont do it out of the goodness of their heart fo they? They want to make some money, and although it is an assumption, I would imagine it is safe to say they want to make as MUCH money, as FAST as possible. Yes of course they want to limit risk/draw down. But its not like they don't have financial incentive to make more money. This just doesnt jive well with natural selection/market efficieny - Someone makes a fund that blows the rest out of the water, and everyone will switch to him, thus forcing the rest to up the ante. Isnt this how business works!? I mean, not 100% of managers can think this way, unless you believe it is an industry conspiracy. I would tend to think there are more technical issues/regulations preventing higher returns than LACK of trying/desire. If you look at the disparity between annualize fund returns and private trader returns in the competitions, were talking 12% annual VS HUNDREDS of percentage points. Im sure there are at least a few people out there who would love to start a fund, get insane returns for a few years, take the 20% off the top as well as trade your own money, and then retire a gazillionaire in 3 years.
Something just doesnt add up with all of this....

I think the factor you may be looking for may be threefold.

1. a manager may also take into consideration the risk tolerances of his clients therefore will limit his drawdown and risk-taking to meet their needs. whereas before when he was a private trader his risk tolerances were different.

2. the markets do not always produce profit-capturing opportunities. when they are there, fast traders may capitalize on them. when they are not, and traders push it they can lose. markets can be flat, moving well, or volatile. If they are not, some traders simply don't enter the market - overall in both cases reducing their returns for the year.

3. even the best trading systems work in some kinds of markets and set-ups but may not work as well in others. the markets are always changing. a killer system that works perfect for a day or a year may suddenly begin not working as well. again, diminished returns are the result.

 

[FXsKaLpEr]

Quote from Grob109:

"Something just doesnt add up with all of this...."

Here's a short story......

Around '61 or so I was just settling into a life in Greenwich, Conn.

As it goes, there are seasonal parties and people do meet people while grazing and imbibing. A broad mix of types.

I meet a guy who was tall and suave and well spoken....

After a while I knew what he did and in passing he did inquire of my vocation. I failed his test up to the point where I said I did what he did but just as an avocation to pass the spare time I had in the work I was doing.

He's a pro like you are speaking of and I am just an amateur.

We kept in touch over the years.

Early on was was asked to contribute to his operations. So I did.

They paid portal to portal from Greenwich to NYC or any other place where I spent time. (sleeping time included).

All I can say it that there is a mystic about providing white papers that are acted upon. I never provided any, mind you, I just critiqued them and "fixed" them.

Its like a big effort almost around the clock gets a draft ready for timely distribution and chacks come back if the info is acted upon.

I am asked to review the draft. I cannot imagine how the workers came to their viewpoints and how all the data they asembled says to do this or that. It is like a disconnect from reality.

I never had to aurgue for my points and revisions; they just flew.

Naturally you can say " Hershey that why the users never made any money with the white papaers. But they did!! And it was an anomoly that they did in that shop. I was narrow in those days because everything about position trading was done by hand. I just did trading in about four sectors that invloved primary industries. There was always action in one or more.

Meetings, luncheons, conferencing, it was all the same. A good colateral example is the business of financial planning for wealthy people. These guys are all licensed too. The ivy league schools are steeped in it.

Look at the top 25 in EMBA (BW) and you can see that even the criteria there is not appropriate.

Also note this week that they commented on hurricaine control (spreading stuff on the water....lol)

What doesn't add up is the way tradition and self selection just creams the possibility of anyone accomplishing anything in the industry.

It is very acceptable to not achieve anything except to perpetuate the status quo.

I designed a handicapping method for the racing committee of the NY Yatch Club one off season. It was deja vu; they just sat there and said "WE can't do that" I paired racing records with boat design; what did it say?.....lol young skippers (all blue bloods) in used boats were out sailing the older skippers with the bright and shinny new boats. Think TJ Watson and Palawan (350k tank testing cost in Holland) against John Marshall and Vat 69 (a used Bounty II).

These parallels are ingrained in the society and who owns the businesses (old money).

You can look at the failure of the recent Greenwich based Nobel loaded whatever and see how traditioal BS sunk it.

Now, you can see that STEVIE has wormed his way onto the local turf but he is an "outsider" player who also can't quite rip it off.

Those oak desks and panelling in Nebraska is not a super game either. OPM is whats makes it tick and it is't notable either.

The third meeting of our local IBD club had its first cycles of "making money" occur. We are meeting every two weeks now. The guys who weren't on paper were turning over 10% a week, they say We work about 3 hours plus a meeting and they just nail the techniques down like it is a fifth grade test on fractions. No one really knows that using todays computers could possibly limit making money in any way. They Just Do It. The lousiest skilled three day trade was 28% and the others (top dogs) were running around 40% a pop in one cycle.

People have told you size is a problem for big money just cause tey are all continually invested. I set a limit of not trading more than 10% of the cummulative daily volume of an issue as an amateur. Obviously I am anything but big money. But I am timely as all get out which is the exact opposite of balancing portfolios.

Why would anyone ever balance a portfolio???

Balance??????

Why??????

that wasn't a short story.

 

[Grob109]

Quote from FXsKaLpEr:

that wasn't a short story.

That is very true for you. There are many people in the world who think anything clear and important can be written on one page.

There are others who have attention deficit disorders.

How far did you get in reading what I wrote? Did you break it up into parts by reading as far as you could and making a note of where you had to stop? If so, how long did it take you to recover from the effort?

If you answers these Q's don't feel compelled to do it all at once if your given answer is in depth.

 

[drsteph]

Quote from Grob109:

"Something just doesn't add up with all of this...."

Here's a short story......

<snip>

People have told you size is a problem for big money just cause they are all continually invested. I set a limit of not trading more than 10% of the cumulative daily volume of an issue as an amateur. Obviously I am anything but big money. But I am timely as all get out which is the exact opposite of balancing portfolios.

Why would anyone ever balance a portfolio???

Balance??????

Why??????

Don't be so quick to knock portfolio rebalancing. While I am leery of its long term implications in an uncertain world (i.e. what has worked for the last 70 years post depression may not work in the future), you must admit that winning a nobel prize for something (MPT) does at least suggest that, at the time, it was a good idea.

The main tenet of MPT & rebalancing is that it minimizes overall risk while coming close to maximizing overall return. While I cannot find the specific numbers from a study I recall reading, comparing a rebalanced to an unbalanced portfolio gave you a 10% avg return with a -4% max annual Drawdown for the rebalanced portfolio vs. 11.2% annual return and a -10% max annual drawdown on the non-rebalanced portfolio.

For my "I need this money not to go away " portfolio, I'll choose the rebalancing. I'm not looking to make a killing there, just have a reasonable chance of preserving capital and outpacing inflation.

For my "aggressive investment" portfolio, I'll probably not rebalance - rather just trade in and out of funds, ETF's or individual larger caps. 20% maxDD there for a 20% or larger ann yield.

For my "risk capital" portfolio, I'll never rebalance. But I'm willing to risk 50-100% of that portfolio for a 100-300% return. Those are purely spec plays, options, growth small caps, futures, whatever.

And for the record, since a lot of these funds are really similar to trading an index, why can't you 'trade' them? One of the most important decisions you will make is WHEN you buy into the fund, so if you know that the market is going to crap out in october, why would you purchase your S&P index fund in september? Buying yesterday vs at the top in september saves you 4%, which is about half your annualized expected gain after expenses. Now, it is much easier to have an 'up' year. Ditto for the rebalancing - choose your view and go with it. If you are wrong, well then you're wrong.

I'll make $$ any way I can. I'm not too proud to use 'funds' when appropriate.
But I'll choose my entry/exit points, thanks.

 

[FXsKaLpEr]

Quote from Grob109:
How far did you get in reading what I wrote?

the second sentence after "Here's a short story......"

Quote from Grob109:
If so, how long did it take you to recover from the effort?

20 minutes. no no wait! 15-minutes. yeah.. no no wait! yeah... more like 15-minutes.

Quote from Grob109:
If you answers these Q's don't feel compelled to do it all at once if your given answer is in depth.

Oh-Kay.

 

[Grob109]

Quote from FXsKaLpEr:

I think the factor you may be looking for may be threefold.

1. a manager may also take into consideration the risk tolerances of his clients therefore will limit his drawdown and risk-taking to meet their needs. whereas before when he was a private trader his risk tolerances were different.

Some brokerages are set up to only handle those who pass their tests. They are called boutiques. Their primary purpose is to make money for people who understand making money with money. Their consistant goal is to takeout of the market what is available. Drawdown is not on the table in these instances. Money velocity is. You may want to check out the scene to find out what is going on in the real world. The lower limit of operations of these outfits is usually 8 to 10 times the average of ten years of market operation.

2. the markets do not always produce profit-capturing opportunities. when they are there, fast traders may capitalize on them. when they are not, and traders push it they can lose. markets can be flat, moving well, or volatile. If they are not, some traders simply don't enter the market - overall in both cases reducing their returns for the year.

Here is a rewrite of your coment: " The markets always produce profit-capturing opportunities. Always being there, any EOD full time employed trader may capitalize on them. It is always true that segments of markets may be flat, moving well, or volatile (and traders who do not prepare well may push it they can lose). At all times, every day a trader has an opportunity to enter the market and make money on the level of any boutique brakerage operation. .

3. even the best trading systems work in some kinds of markets and set-ups but may not work as well in others. the markets are always changing. a killer system that works perfect for a day or a year may suddenly begin not working as well. again, diminished returns are the result.

The above is not a test of a viable trading system. If a given system operates as described above it should be dispenced with and never used again. Any viable trading system works throughout the range of operation of the markets. It may be seen in this thread that most people do not "get it" with respect to making money.

Making a trading approach immune to the verities of the market is not difficult to do. Any person can reasonably be expected to accomplish this. The above was written by a high school drop out and that has nothing to do with his limited view so far in his life. He could any time he wished go through the process of coming up with a bullet proof trading approach for the stock markets. I use the attached to start anyone down this path. It has been shown in ET that the first year of instituting a process nails about 100% ROI/yr. After that, several doublings can occur.

There is no mystery about how to make money in the markets.

 

[areyoukidding?]

they are not scalping. they are trying to earn fees. this is a fee based business, just like wall street.

 

[dont]

Quote from areyoukidding?:

they are not scalping. they are trying to earn fees. this is a fee based business, just like wall street.

Fees which are paid monthly or quartely why do you think they push the prices at month end quarter end. They get a % of assets under management. a tiny increase in this fee adds up over years. They are not paid for performance.

 

[OddTrader]

Quote from malaka56:

Hi, this is probably a newbie questions, but Im curious as to what you people think are plausible answers.

So far, from what I understand to gain an "edge" in the markets, you have to exploit a certain inefficiency. Generally people don't like to tell others about these, because the more people that know about them, the more will use them, thus making it less and less effective. Someone on ET said they read it takes about 3 years for a market inefficiency to have severely diminished returns.

So, you have people in the markets who have INCREDBLE gains. Im not talking about 12% a year mutal funds, or even some hedge funds, but like 10% a week, or even in the hundreds of percentage points a year. Obviously with certain markets trading with the billions of dollars in a mutal fund will raise filling issues (equities is what im thinking), move the market, etc etc, but what about gigantic markets that eat a billion dollars for breakfast like FOREX? This could easily handle the volume needed to trade with large mutal funds.

Then there is the argument that it is more profitable to trade for oneself. This may be true, but if you get the 20% performance incentive offered by many hedge funds, it would be pretty hard to beat the raw capital gain with your own money, at least for a while....


So my question is, why are all these mutual funds performaing so poorly? because the equities market? they want to limit drawdrown SOO much, performance suffers? Then why arent hedge funds making INSANE returns? If you look at the index, and performance of these funds, it hardly seems to be worth it. Then you see the claimed returns of some posters on here (granted there is no verification), BUT if anyone ever looks at trading competitions like FXCM, trade2win, and consistently (yet simulated) programs like on collective2, and the number of other trading competitions. You can argue that getting returns like on FXCM of 700%+ a month, is not consistent, and it would be hard to tell because they only have montly trades, but if you look at longer term simulated programs, they are consistent over 36 week terms.

So how come there arent any super high performing hedge funds, or decent performing mutal funds? thanks.

Quote from LoosenUp:

Hi,

I have often ask the very same questions myself and I think it is because:

1) The bigger the fund size, the more limited are their product choices due to liquidity problems.

2) Fund managers sometimes failed to cut losses short because they would look like fools if it was just a false whipsaw move so they tend to hang on to losing positions and average down to lower the cost basis.

3) The incentive to keep the job and not rock the boat means they are going to be very conservative. Stability of job is their top priority and they sleep well at night. Striving for higher returns means higher risk is involved and it is not worth it.

4) Some fund managers might not use their best strategies because they always keep them to themselves.

5) Their strategies are also limited to what is allowed under their fund's trading mandate.

6) Major trading decisions are seldom made by a single person. Mostly they must be approved by investment committee and it is easier to go along the consensus rather than stick your head out.

Great posts indeed!