> That isn't conventional wisdom. It's not someone's opinion. It's statistically proven reality. Whether you're an individual trader or a billionaire hedge fund manager, active strategies lose out to passive ones in the long run.
This claim is false. Some funds have overperformed year after year with high margins and (relatively) low risk, for decades. For example, Renaissance Technologies' Medallion Fund and Warren Buffett's Berkshire Hathaway. Please show me the "statistically proven reality" that explains these returns.
Warren Buffett's investing performance can be explained by an intuitive understanding of known market factors (the French-Fama five-factor asset pricing model, etc.) [1].
The Medallion fund is a whole other kettle of fish. Medallion uses extremely sophisticated models which took Jim Simons and his team of math wizards more than a decade to figure out, using vast amounts of historical data and computation. The fact that nobody else is replicating their performance should tell you just how difficult it is.
In 2019, 71% of actively managed funds lagged behind their benchmark according to the S&P. In 2020, it was "just" 57% [2]. Meanwhile, 70% of active funds have been liquidated the last 20 years. There are of course years where actively managed funds are the winners, but over time, actively managed funds tend toward the mean, either lagging or matching the S&P 500.
> The Medallion fund is a whole other kettle of fish.
It should be noted that while markets may be mostly efficient, I do not think anyone is claiming they are completely efficient.
If there are price discrepancies/anomalies, they could be exploited, at least some of the time. It could be that Medallion can find some and exploit them, say, 55% of the time. But over a large volume of transactions.
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> It should be noted that while markets may be mostly efficient, I do not think anyone is claiming they are completely efficient.
This is false. Grandparent is specifically claiming that markets are completely efficient. Here is a direct quote: "Whether you're an individual trader or a billionaire hedge fund manager, active strategies lose out to passive ones in the long run."
In addition, many academics are also making this same ludicrous claim.
> In 2019, 71% of actively managed funds lagged behind their benchmark according to the S&P.
Yes, you have a market where participants trade against each other, and you discover that the average participant in the market does not "beat the market". That should be obvious. The question in dispute is whether _anyone_ can beat the market, and there's a mountain of evidence that certain people/funds beat the market year after year.
Yes, you can beat the market. But anyone cannot beat the market.
This is a problem for retail investors. Studies such as this one [1] have shown that the past performance of an actively managed fund does not predict its future returns. In other words, while there are certainly actively managed funds that beat the market in some years, a retail investor picking a mutual fund based on past performance is likely to be disappointed.
So how do you pick the fund that will give you high returns? Turns out this is exactly the same problem with individual stock picking, but instead of trying to pick winning stocks on the stock market, you are trying to pick winning managers in the mutual fund business. And your success in doing that ultimately comes down to chance.
> Yes, you can beat the market. But anyone cannot beat the market ... a retail investor picking a mutual fund based on past performance is likely to be disappointed.
We are in 100% agreement.
I only wanted to correct the misinformation spread by grandparent who claimed that nobody can beat the market.
Since this is in reply to me, let me ask, what's the implication here? The tone of your post sounds like you disagree with me, but it's not clear what exactly you disagree with? Grandparent claimed that no-one can beat the market. I said that Renaissance Medallion Fund beats the market. Then you post a single-year performance of +76%, which is a really good performance for 2020. So... you agree with me?
I don't disagree with you that individuals can outperform the market.
I do think it's worth pointing out that that doesn't mean that the average retail investor will generally outperform the market, even if they're sophisticated enough to have even heard of Renaissance.
1. I think you'll find that funds that consistently beat the market for so many years are not taking investments.
2. Buffet himself says: "In my view, for most people, the best thing to do is to own the S&P 500 index fund"
> 1. I think you'll find that funds that consistently beat the market for so many years are not taking investments.
Yep, I agree.
> 2. Buffet himself says: "In my view, for most people, the best thing to do is to own the S&P 500 index fund"
Again, we are in agreement. I'm not sure what exactly it is that you feel you disagree with me about? Grandparent claimed that _nobody_ can beat the market, and I provided references to evidence that some people can beat the market.
Many folks see Boglehead-ism as some sort of science. It’s not bad advice for a disinterested investor in the US, but not exactly optimal advice either.
I’d rather have my AAPL over the last 5 years than VTI+BND.
The Vanguard 500 Index Fund (VFINX) has existed since 1976.
Kenneth French (the "French" in the Fama-French asset pricing model) provides market data going back to 1972 [1] and can be used to reconstruct index fund performance.
Citadel doesn't have individual clients, and if you're not a billionaire I don't see how you'd gain access to their hedge fund.
Huh? The first index fund was started 45 years ago, and indexes existed and are tracked far longer than that. Tell me what percentage of hedge funds beat the S&P over the last 50 years?
If you cherry pick the US S&P (over international, and over small cap), I’m allowed to cherry pick hedge funds.
Many funds consistently outperform the S&P by 2-3X over 30-40 years. Minimum investment, $5-10M, of course.
Buy and hold is the best option for those under USD $10 million net worth, but you must acknowledge there are semi-closed funds/prop trading firms that consistently beat the market.
Stop being poor so you can go into those badass hedge funds that always beat the S&P 500 /s
But seriously, I'd rather just put money into VTI and VXUS and go back to playing video games, planning a D&D one-shot, programming a bit, or hanging out with friends in my spare time. Let the active traders waste their time poring over 10-Ks and/or charts. I'll be here having fun and taking what the market gives.
> Yes, just like there are individual stocks that beat the market. How do you pick them?
The same way you picked your passive index fund: look at 20-30+ years of data.
Unfortunately, VTI, VT, VOO all underperform the top hedge funds, when evaluated over 20 years (risk adjusted return, downside deviation, and absolute return). I’d go further back but VTI was created in 2001 whereas the hedge funds were created in 1980/1990.
I picked S&P because it's one of a handful of widely reported indices and it was created roughly in the same era as the original vanguard index fund, not by cherry-picking data.
Your statement that major index funds all underperform the top hedge funds is tautological, of course the ones that beat the averages are the top funds. What I'm genuinely curious is: how many hedge funds were there in 2001 and how would you identify the top ones?
The other important question is whether a retail investor can join it. I know someone like baobabKoodaa [1] would shout from the rooftops, "You're moving the goalposts, grandparent, waaaaaaaaaaah!" Well, I'm not grandparent, so my goalposts are completely different from theirs.
My goalpost is whether a retail investor like me can get in on those high-flying funds. If not, then in the retail universe, they may as well not exist. Thus, I'm better off investing in VTI/VXUS and using the rest of my spare time coming up with some funny ways to challenge my party in a D&D one-shot.
What percentage of hedge fund clientele exclusively invested in a single hedge fund 50 years ago? Many index fund evangelists focus on that assumption. It’s a strawman.
You can invest actively and intelligently. For example, my 401k offered an emerging markets fund (MGEMX) that isn’t the ideal fund from a cost structure perspective... but it performed really well for a few years. It wasn’t speculation or reckless behavior to have exposure to that sector. Portfolio rebalancing booked my gains when it was rising 30%, and I ended up doing well when 2008 killed that sector.
That doesn’t mean buy and hold doesn’t make sense either. If I was lucky and held on to an early fun money Bitcoin buy I’d be on an island right now!
That makes no sense. The claim I'm disputing is of form "X is true for everyone". A single counter-example is sufficient to disprove a claim of this form. Grandparent claimed that everyone would be better off investing passively than actively. So a single counter-example of a genius like Simons is sufficient to disprove that claim.
Please stop trying to re-define words which already have an established definition. "Passive" and "active" investing are well defined concepts, and Berkshire Hathaway falls squarely in the "active" category.
Fair criticism of my phrasing, but at the same time you can't put day traders, HFT, or most hedge fund strategies in the same bucket as Berkshire Hathaway. There is a distinct difference in time horizons behind the strategies.
This claim is false. Some funds have overperformed year after year with high margins and (relatively) low risk, for decades. For example, Renaissance Technologies' Medallion Fund and Warren Buffett's Berkshire Hathaway. Please show me the "statistically proven reality" that explains these returns.