| What you say might be right. But there is the purely ontological question (do traders exist that outperform consistently?), and the different pragmatic question: Does it make sense to part with my money and give it to active asset managers? The answer to the theoretical first question might well be "yes, there are exceptional traders outperforming the market". The second "real-world" question is much more involved: * can I reliably identify them, ex ante? That's pretty hard. * do I have access to them? Many of the examples cited (Renaissance Tec, individual traders trading personal account) are closed to outside investors. Many golden investment opportunities are channeled to people that are very well connected (either in the finance industry, or old money, or close to politics). Similarly, there might be legal access restrictions - you must be a qualified investor, or reside in a certain jurisdiction, etc. etc. Personally, I think most of the asset management industry is basically a giant rent seeking exercise, charging extraordinary fees (over the long run) for very little value. There are exceptional performers, but they are not accessible to most people. (As a side note, much of their exceptional performance might come from insider information more than exceptional analysis.) Thus, the standard advice stands: put most in cheap index funds/ETFs, and maybe develop some expertise in certain areas and dabble in it with a fraction of your assets, if you're so inclined. The reasons that the finance industry is particularly prone to unproductive money skimming (rent seeking) include: * massive information asymmetry (similar to real estate) * psychological biases (most people don't realise that someone taking a tiny 2% fee per annum has basically taken half your savings by the time you retire) * mostly experience goods (or even post-experience goods): enormous difficulty of evaluating quality ex ante, or sometimes even ex post (your pension pays you X per month. Could a competitor have done better?) * regulatory capture etc. The coin analogy is a perfectly legitimate parable to highlight how difficult it is to evaluate asset manager performance. Sure, the actual analysis then still needs to be done, but the outcome, from what I can tell, remains pretty damning. |
The answer to question one, as you say, is yes. If it was purely coin tossing any group of performers would get halved each year (let's not mention skew). Now there are funds that fall quite hard, like Odey. But it's clear there are funds that seem to defy gravity.
Question Two. Here's how I decide if I believe in a fund.
Here's a real life example. A friend of a friend came to a meeting and explained that under certain circumstances, you can buy certain unit trusts cheaper than they're worth. You need to dig out the nitty gritty details of each fund: the holdings, the rules, the fees, trading regulations, and so on. You put all this in a computer, which tells you when there's a mispricing. You need good relations with various counterparties, or you won't get the trade. And you can only do it up to a certain scale, because there's only so much mispricing. And it's sensitive to costs, so you need his particular cost agreements.
This also explains why you'd have to invest in this particular guy. He has the infrastructure and relationships already in place, so even if you knew his method, you couldn't do it yourself.
You're right about a lot of funds being smoke and mirrors though. I used to run one, and the investors never ask the right questions. Mostly they chase returns, but they don't even know how to tell the difference between one track record and another. It makes a huge difference how they're generated, yet most questions are simply trying to put you in a category, like produce in a supermarket.