The first half of this year again brought hedge funds little relief from their historically poor performance.
Hedge funds began 2014 coming off their fifth-straight year of trailing U.S. stocks by some significant margins. And based on data through June 30, it doesn’t look like this year is shaping up to be much better. The latest data show that investors continue to pour money into hedge funds, which had total assets under management at the end of April of $2.9 trillion, a new record.
Despite ample evidence of their underperformance, hedge funds continue to attract great attention from investors. I’ll never stop asking, Why? And instead of the hype and hope that investors so often hear from hedge fund managers, I’ll simply continue to provide you with the hard data on their performance.
Read the rest of the article on ETF.com.
The evidence is overwhelming that most actively managed funds underperform their appropriate benchmarks, especially after taxes.
However, not all actively managed funds underperform, just a large majority of them. Those who believe in active management as the winning strategy believe they can identify the small minority of actively managed funds that will outperform. The only-somewhat logical way to choose these funds is to rely on past performance as a predictor of future returns.
One test of whether or not past performance is predictive of future performance is to see if more actively managed funds outperform than would be randomly expected. If fewer funds do so, it’s hard to know if any outperformance was simply a result of random luck—just as someone might flip 10 heads in a row—or skill. Because there are enough actively managed funds in the market playing the game, at least some should be randomly expected to outperform their benchmark 10 years in a row.
Read the rest of the article on ETF.com.
My column from July 14 on the persistence of the small-value premium resulted in some interesting discussions on the subject. I thought it would be informative to share one of them.
One reader pointed out that in the past 20 years, midcap value stocks had outperformed small-value stocks. For the period from July 1994 to June 2014, the Russell 2000 Value Index returned 11.04 percent while the Russell Midcap Value Index returned 12.47 percent. Thus, for that 20-year period, it looks like midcap value stocks outperformed small-cap value stocks by 1.43 percentage points per year.
Before taking a deeper look at the returns data, it’s important to note that, as with any factor, there’s a non-zero chance small value will provide a negative premium. This is true no matter what the factor or how long the horizon. Thus, while it would be an unexpected outcome, we shouldn’t be totally surprised if midcap value stocks did outperform small-value stocks over a 20-year period, or even a longer one. That’s one reason investors should diversify investments across factors and not concentrate all their eggs in a one-factor basket.
Read the rest of the article at ETF.com.