[santoriv]

Very few active fund managers can consistently beat their indexes. Why do you believe you would be better over a long period of time?

Vanguard Study of Actively Managed Funds vs Index Performance: https://personal.vanguard.com/pdf/ISGIDX.pdf

[ltbarcly3]

You are assuming fund managers want to maximize returns for investors. That is not the game they are playing at all.

Fund managers have pathological incentives. People won't hand them money if they say 'I'm going to just hold this money as cash for the next 1-5 years until the market goes completely irrational in a way that I can make you 5x returns, but in the meantime I'm going to charge you 2% per year on the balance'.

They have to put that money in to something or they won't be given money in the first place.

Secondly, funds play games with the money, because investors are not sophisticated and there is a ton of dumb money in retirement accounts. People look at the past returns and choose funds that have a high past rate of return. Fund managers know this, so they set up 15 funds with different strategies. One of them has a high rate of return, by luck, while 14 do much worse. Then they expand that fund 10x by quoting that high rate of return.

Fund managers can make more money by not optimizing how much money they make for you, if you measure them by how much money they get paid to manage other people's money you'll see they are playing that game very well.

[manigandham]

Note that report is Vanguard marketing material and most managed funds have specific mandates (like maintaining a certain volatility or investing in certain securities) other than maximizing gains.

This is why hedge funds underperform indexes in bull markets but beat them in turbulent times.

[FabHK]

> This is why hedge funds underperform indexes in bull markets but beat them in turbulent times.

Agreed on the first part; I’d want to see hard statistics (after fees) on the second part (and, no, citing the 3 or so famous exceptions that are closed to outside investors and might have used illegally obtained insider information doesn’t invalidate the larger point).

[manigandham]

Hedge funds trade gains for consistency. They don't publicly report numbers though and aren't meant to be public funds (that's what ETFs are for) so it's hard to get full stats, but it's common knowledge in finance.

[nl]

This is why hedge funds underperform indexes in bull markets but beat them in turbulent times.

Hedge funds have only outperformed the market twice since 2008.

Once was during the financial crisis of 2008 (-19% vs -37%) and once was 2018 (-4.07 vs -4.38).

It's unclear what benefits you are getting here.

[samsonradu]

The market after 2008 has been on a historically low volatility and a record bull run isn't it?

[manigandham]

That aligns with what I said, although there are plenty of private hedge funds that don't report their returns. The benefit varies for each client.

An example would be a real-estate company that has holdings in a fund. Preservation and low volatility is far more important than raw gains and can be used as collateral to offset losses in physical property valuations.

[austhrow743]

>Very few active fund managers can consistently beat their indexes.

Funds profit from managing more money. The more money you manage, the harder it is to find plays that use a significant amount of it. So it makes perfect sense that funds would increase in size until they perform at a rate similar to indexes.

>Why do you believe you would be better over a long period of time?

The fully loaded cost of even a junior analyst would be in the hundreds of thousands a year. Independent day traders can focus on strategies that leverage such a tiny amount of capital and result in such a tiny return that it's not profitable for a fund to be looking at. Keeping in mind that "too small for a fund to worry about" can still be "shitloads of money" for 99% of people.

[totalZero]

Beating indices in a correlated bull market isn't the same thing as making money consistently.

The contrapositive of your argument is that anyone who is holding cash outperformed the S&P today. Though true, it sounds silly to say that someone who goes about his day with a $100 in his wallet is outperforming the market, no?

In a disperse market, single stocks chosen correctly will outperform the index. In a correlated bull market, the index will outperform.

We are not exactly in a bull market right now.