[Link] Mutual fund fees

post by James_Miller · 2016-04-23T22:09:39.949Z · score: 3 (4 votes) · LW · GW · Legacy · 25 comments

An easy win for rationalists is to avoid actively managed mutual funds.  As a NYT article points out:   

 

"High fees, often hidden from view, are still enriching many advisers and financial services companies at the expense of ordinary people who are struggling to salt away savings....even for retirement accounts that are to be covered by the rules, many advisers are not required to act in their clients’ best interests. This means that they are legally entitled to look out for themselves first and recommend investments with higher fees, to the detriment of those who have asked for help....even when fund managers succeed in outperforming their peers in one year, they cannot easily repeat the feat in successive years, as many studies have shown. That’s why low-cost index funds, which merely mirror the performance of the market and don’t try to beat it, make a great deal of sense as a core investment....With fees included, the average actively managed fund in each of 29 asset categories — from those that invest in various sizes and styles of stocks to those that hold fixed-income instruments like government or municipal bonds — underperformed its benchmark over the decade through December. In other words, index funds outperformed the average actively managed fund in every single category....Investors who believe they have found honest and skillful advisers may still want to understand all of this. Not everyone truly has your best interest at heart."

25 comments

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comment by Gleb_Tsipursky · 2016-04-24T17:24:59.940Z · score: 0 (0 votes) · LW · GW

Yup, which is why I generally go with ETFs.

I've begun to invest with Spencer Greenberg's mutual fund recently, however, I like its approach to using machine learning to identify good stocks.

comment by [deleted] · 2016-04-24T23:41:44.788Z · score: -2 (4 votes) · LW · GW

To conclude: 'avoid active funds is a gross oversimplification of the quote that is misleading and therefore inappropriate for a top-level discussion post. In their analysis, index funds may have outperformed average actively managed funds in every category, but that doesn't mean they dominate them, in game-theoretic sense, as an investment class. After all, active funds are a superset of activists funds who more often than not are creating the value that the companies invested in would not have otherwise created. There is a sense in which investing in activist funds is a kind of philanthropy rather than mere investment opportunity. By contrast, passive or index funds merely throw more money at a firm...

comment by ChristianKl · 2016-04-25T10:44:08.816Z · score: 0 (0 votes) · LW · GW

After all, active funds are a superset of activists funds who more often than not are creating the value that the companies invested in would not have otherwise created.

Are you claiming that as an asset class activist funds outperform the index funds? If so, what's your evidence for the claim?

comment by [deleted] · 2016-04-25T11:51:26.965Z · score: 0 (0 votes) · LW · GW

It's common knowledge in wealth management circles.

Over the course of nearly a decade, the Novus Activist Portfolio generated returns near 267 percent, more than double the returns of the S&P 500 (INDEXSP:.INX) and the HFRI Composite Index, which tracks general hedge fund performance, a recently released report from Novus shows.

Cumulatively, the activists trounce both the market and the hedge fund universe in terms of simulated absolute return,” the Novus report, “Actively Tracking Activists, claimed. The report only considers long positions publicly disclosed by the activist hedge funds, excluding any Swaps derivatives contracts and short positions.

comment by ChristianKl · 2016-04-25T12:48:59.824Z · score: 0 (0 votes) · LW · GW

To me their selection criteria isn't clear. At the moment I'm not confident that they didn't simply weighted the winners more strongly.

Can someone with more domain expertise look at the claims of Novus?

comment by [deleted] · 2016-04-26T00:11:11.247Z · score: 0 (0 votes) · LW · GW

weighted the winners more strongly.

I don't understand what you means. Like fixed vs random effects meta-analyses?

Why don't you just look it up yourself? This isn't exactly controversial.

comment by gjm · 2016-04-26T11:09:32.204Z · score: 3 (3 votes) · LW · GW

I think CK means: for all one can tell from Novus's output, they might just have identified a bunch of successful funds and declared them "activist". That would certainly lead to the conclusion that "activist" funds are more successful, but it wouldn't offer any evidence that picking "activist" funds by criteria that don't involve success offers any advantage.

comment by ChristianKl · 2016-04-26T13:18:02.207Z · score: 0 (0 votes) · LW · GW

That would certainly lead to the conclusion that "activist" funds are more successful, but it wouldn't offer any evidence that picking "activist" funds by criteria that don't involve success offers any advantage.

Furthermore the criteria don't have to be explictely about success but can be implicetly about it.

comment by [deleted] · 2016-04-26T13:11:25.504Z · score: 0 (0 votes) · LW · GW

That sounds extremely poor methodologically/deceptively and so unlikely.

comment by gjm · 2016-04-26T13:14:26.197Z · score: 3 (3 votes) · LW · GW

Sometimes people do things that are methodologically poor and/or deceptive. If they have a financial incentive to, "sometimes" becomes "quite often". Do Novus have any such incentive? E.g., are they inviting people to pay them for more information about "activist investment", or running some kind of "activist fund" themselves?

comment by [deleted] · 2016-04-26T22:07:59.207Z · score: 0 (0 votes) · LW · GW

Henlons razor, sure, but they confirm my prior knowledge so I'm don't need to doubt it.

comment by ChristianKl · 2016-04-28T16:05:29.663Z · score: 1 (1 votes) · LW · GW

Do you think your prior knowledge is independent of the marketing for activist funds done by Novus and also the activist funds themselves?

comment by [deleted] · 2016-05-02T23:12:42.607Z · score: 0 (0 votes) · LW · GW

Yes

U.S. equity index funds have grown dramatically in recent decades, from a negligible $500MM in assets in the early 1980s to a staggering $4T today. The consensus view in the investment community is that this growth is unsustainable. Indexing, after all, is a form of free-riding, and a market can only support so many free-riders. Someone has to do the fundamental work of studying securities in order to buy and sell them based on what they're worth, otherwise prices won't stay at correct levels. If too many investors opt out of that work, because they've discovered the apparent "free lunch" of a passive approach, active managers will find themselves in an increasingly mispriced market, with greater opportunities to outperform. These opportunities will attract funds back into the actively-managed space, reversing the trend.

Except the author forgets one thing. The other option is justn't fundamental analysis, it's MAKING those companies actually more affecting - GIVING VALUE. That's investor activism.

Other key points:

the returns of the active and passive segments of the market end up being identical, equal to 7.7%.

the individual members of the active segment do trade with each other. But their trades are zero-sum–for every share that an active investor buys, some other active investor is selling those exact same shares, and vice-versa. Consequently, the aggregate “position” of the active segment stays constant at all times. Because that position was initially set to be equal to the aggregate position of the passive segment, it stays equal for the entire period, ensuring that the aggregate returns will be equal as well.

comment by Larks · 2016-04-27T00:47:58.885Z · score: 1 (1 votes) · LW · GW

I think this is very likely. When going to label funds, naturally currently existing ones come to mind - but these are the survivors. Failed activists funds don't leave much of a track record.

comment by Lumifer · 2016-04-27T02:03:20.277Z · score: 0 (0 votes) · LW · GW

That's not how it works. See e.g. this and, in particular, this.

comment by Larks · 2016-04-27T23:42:37.943Z · score: 1 (1 votes) · LW · GW

They don't mention being survivorship-bias free, which I would expect them to if they were.

comment by Lumifer · 2016-04-28T14:45:05.493Z · score: 0 (0 votes) · LW · GW

I'm not commenting on that study which I have not read, but merely point out that it is possible to do such studies right.

comment by Larks · 2016-04-29T01:35:52.369Z · score: 0 (0 votes) · LW · GW

Yes, I agree it's possible to do them correctly. But few people do, and finding positive results is so much more likely if you do them wrong that poor methodology should be the default explanation for any such positive result.

comment by [deleted] · 2016-04-27T01:53:37.569Z · score: 0 (0 votes) · LW · GW

Why don't we turn the academic literature then. There, failures are just as interesting as successes.

  1. Activist hedge funds are high risk high reward. So yes, selected bias would make them seem like outlier successes beyond their competitors. Let me steel man your argument: Ryan and Schneider (2002) predict that larger hedge funds are likely to be more activist, and that looks roughly the case (consider Blackrock which managed just about everything everywhere). That's reverse causality right there.

Unlike pension fund and mutual fund managers, hedge fund managers face no legal requirement to diversify, and may instead ‘‘bet the farm’’ on target firms. Taking large stakes in few firms encourages them to become involved in firm management (Brav et al. 2008a).

Unlike pension fund and mutual fund managers, hedge fund managers face no legal requirement to diversify, and may instead ‘‘bet the farm’’ on target firms. Taking large stakes in few firms encourages them to become involved in firm management (Brav et al. 2008a).

However, would that explain all the variance? Possibly. But it's not the only nor most parsimonious explanation.

Hedge funds are also able to engage in investment strategies that make them different in kind from institutional investors. In addition to selling short, a hedge fund might purposefully engage in actions intended to decrease a company’s stock value. For example, at Lowe’s Corporation (Anson 2002a) and Dura Auto Systems (Grossman and Nussel 2008), hedge funds purchased sufficient distressed debt of the troubled firms to compel their executives to declare bankruptcy, then transformed them from public to private companies, with other investors largely losing their equity in the process.

Say you picked the highest return indexes - generally emerging country indexes' risky industries. Consider what activists could do to those kinds of firms? Suddenly those indexes's businesses don't look so solid anymore..

But a conclusion in 'Marguerite Schneider and Lori Verstegen Ryan's "A review of hedge funds and their investor activism: do they help or hurt other equity investors?" where these quotes come from, is that hedge funds tend to be even more activist than be explained by that background noise. That suggests there is some sense in activism, at least among institutions (if regular high net worth individuals pooled their funds they might very well fuck up without great proxy advisors)

comment by ChristianKl · 2016-04-28T15:33:46.528Z · score: -2 (2 votes) · LW · GW

If activism among hedge funds in general is high, than the fact that the average hedgefund does not beat the S&P 500, suggests that the claim that actvist hedge forms outperfom the S&P 500 is less likely to be true.

comment by [deleted] · 2016-05-02T23:13:24.282Z · score: 0 (0 votes) · LW · GW

That's illogical

comment by ChristianKl · 2016-04-26T13:40:17.251Z · score: 1 (1 votes) · LW · GW

Why do you consider it unlikely that publically released information is deceptive?

comment by [deleted] · 2016-04-26T22:05:49.722Z · score: 0 (0 votes) · LW · GW

Reputation and consistency

comment by ChristianKl · 2016-04-27T10:34:32.421Z · score: 0 (0 votes) · LW · GW

Standard&Poor argued in court that no investor is stupid enough to take their claim that they have integrity at face value. Why do you think Novus has a reputation worth trusting?

comment by [deleted] · 2016-05-02T23:14:27.313Z · score: 0 (0 votes) · LW · GW

Because Novus depends on their reputation to make money based on accurate information, whereas S&P make money based on their ability to present information in a charmng light. Different incentives.