Can A Monkey Beat A Hedge Fund? New Study Reveals Disturbing Stats
http://wire.kapitall.com/investment-idea/can-a-monkey-beat-a-hedge-fund-new-study-reveals-disturbing-stats/
This reminds of the story that goes something like this: researchers trained monkeys to throw darts at a board that was then used to pick stocks for a virtual mutual fund. The researchers tracked their monkey fund against the actual fund results as published and found that the monkeys out did the average performance of the professionally (well, by humans, anyway ;-)) managed funds implying that human managers did worse on average than randomly selected stocks. I am not sure how true the story is, but that hasn’t kept me from repeating it as often as I can wedge it into the conversation (this one was a gimme, so I took it).
Harvard MBAs vs. Monkeys
Their goal was to find out just how much value brokers actually created. The found, when you strip out the firms’ fees, just 22% delivered any “alpha,” or risk-adjusted investment gains, at all.
Better yet, they posed this question: How many firms added value (risk-adjusted returns above those of the underlying hedge-fund indices) by picking the right managers, and avoiding the wrong ones?
Answer: After deducting fees, only 5.7%.
This finding has led Brett Arends of MarketWatch to conclude a bunch of monkeys stolen from a zoo would do a better job than MBAs from Harvard.
“You couldn’t make it up. Nearly half of all Fund of Hedge Fund managers, the academics report, delivered “negative after-fees alpha when benchmarked against the hedge-fund indices.” In other words they couldn’t even keep up with the index.”
So your take-home here is you are quite the fool to pay anyone any management fee to run a mutual fund. No one has ever been able to beat the time honored ‘buy and hold’ strategy. Just buy your own diversified fund using dollar-cost-averaging (a complex way of saying just buy the damn stocks/bonds each month irrespective of price).
BTW, here is the link to the paper the article is based on: http://ideas.repec.org/p/sol/wpaper/2013-97544.html
BTW2: Despite my above mentioned suggestion that you avoid paid managers and just buy your own stocks (really, it isn’t that challenging and since you should only be examining your portfolio at most once a quarter, not even very time consuming), I have an idea for fleecing (did I say fleece? What I meant to say was appeal to their more discerned and refined backgrounds that set them apart from us sheeple) rich people by building a hedge fund whose decisions are made by a machine-learning genetic program. The algorithm is basically an extremely complex random number generator (sure it is based on learning the past behavior of the stock market and it is just possible that it might actually identify otherwise missed trends that might be valuable for a few years), but the beauty of it is that because it does all the decision making I can sit on a beach in the Caribbean while I ‘maintain’ the program. I have tried to find people who have the contacts to find the rich people who want to pour money into yet another expensively managed hedge fund, but to no avail. If any of my reader(s) know some contacts and want to try massaging them, please let me know.
Here’s a similar story:
When I was studying quality control I had a book by a fellow named Paul Peach, Quality Control for Managers.
His premise was that most statisticians really didn’t understand statistics, and that certainly ordinary people don’t. He said that one could tell merely by looking at sampling plans.
The amusing part was that he showed that major-league baseball was wasting its time trying to determine the order of the teams, skill-wise. The wins and losses of the top two teams and the bottom two teams were statistically significant. The rest might as well have foregone their games and merely met to toss coins in order to determine their placement.