Solving the Hedge Fund Outperformance Mystery
Top 5 of the Week of October 22nd
Abnormal Returns’ Tadas Viskanta heads up our Top 5 this week with a look at the inconsistent nature of Mr. Market. For Bloomberg, Erik Schatzker considers the state of quant land. And Morgan Housel, a partner at Collaborative Fund, discusses what can impact learned behavior.
Barry Ritholtz, Chairman & CIO of Ritholtz Wealth Management, examines the disappearance of outperformance in the hedge fund industry. And A Wealth of Common Sense’s Ben Carlson looks at the top 1% disparity…
Times Change
- In the early 2000s, GE ranked as the largest company in the world by market cap, since then it has plunged dramatically from its record peak
- Not simply renowned for its dominating U.S. market position, GE’s management, CEO Jack Welch, was well-respected for his management philosophy too
- The lesson to take away is that any of our high ranking FAANG companies can potentially take the same plummet in renown—times change, and success is transient
A Quant Land Crisis of Faith
- 2018 quant performance has had converted investors pulling their hair out and questioning the viability of such strategies
- Investment strategies that never go through bad periods are tantamount to scams—but those that do, while they may not win every week, month or year—demonstrate evidence for long-term investment wins instead
- The biggest reason for this year’s quant underperformance lies with systematic value investing—but there’s no reason to lose faith in that yet either
Have you lost faith in quants? Share your comments in the section below
Stop Expecting the Unexpected
- Events that cause intense stress can impact any learned behaviors that were held prior to the occasion
- Which seems to have happened to many investors since the triple-whammy of “the dot-com crash, 9/11, and the financial crisis”
- The predictions following these events were like most after such crises—an upcoming repeat of what just happened with even greater conviction than ever shown—despite a lack of probability
- We’ve forgotten that “normal, typical results” are what to expect most of the time
Solving the Hedge Fund Outperformance Mystery
The mystery behind the hedge fund sector’s long history of outperformance disappearing in the wake of the financial crisis can be attributed to a few theories:
- The dilution of a limited pool of talented managers; a lack of reliable alpha generators; that while size is a benefit for institutional asset gathering, it can prevent good returns…
- …and also make managers more conservative; social media and group thinking have also possibly had a negative effect, and, finally, it could just be bad timing
The Trappings of Wealth
- Today’s age glorifies the demonstration of wealth, and those that can’t achieve it are seen as failing morally
- Pre-Civil War there were less than a dozen millionaires in the U.S., today though, there are 36 million millionaires
- The more unfortunate thing is that the divide between the haves and have-nots has increased: the top wealthy 1% owns more than the bottom 90% have in any time over the last 50 years
Top 5 of the Week is a summarized collection of financial investment articles that we like and think you might like too. Having written thousands of pages of equity strategy and company research between us, we understand the allure of the ever-changing world of finance. Investing is an art form—and like everything, something you can work on and improve at. There are some excellent writers out there on the finance web, some offer a running commentary on today’s market, some are doing research, some have tips on how to Become a Better Investor, and some just lift the cloud of fog behind a lot of financial jargon. Each week we will keep you up to date with the top 5 articles worthy of your attention.
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