Does long-only active management add any value??
Undergrad interested in LO as a career path. LOon paper; significantly lighter workload than IB/PE, more intellectually stimulating, similar career / comp progression. However, I can't get past this idea that traditional long only investing adds no value at all.
First of all, there's the empirical observation that most funds fail to beat their benchmarks. EMH proponents say this is because the market is efficient. I don't believe the market is completely efficient, but based on the research I've done it seems like traditional mutual fund investing is one of the primary causes of market inefficiency, due to the structural incentive misalignments associated with it. I know many mutual fund PMs are very good investors, but the institutions whose money they're tasked with investing are much less sophisticated. The principles of fundamental value investing generally point toward investing in securities that are disfavored by the market, but the short-termism and backwards-looking nature of institutional capital allocators means that LO investors face a constant pressure to invest in the most favored securities. If domestic has outperformed over the last 5 years, for example, institutions will allocate toward domestic even if investors expect international to have a higher return. You can see this in the contemporary rush to allocate more to alternatives. Cliff Asness wrote of his experience investing during the dotcom era: "At the nadir of our performance, a typical comment from our clients after hearing our case was something along the lines of 'I hear what you guys are saying, and I agree: These prices seem crazy. But you guys have to understand, I report to a board, and if this keeps going on, it doesn't matter what I think, I'm going to have to fire you.'" The structure of LO AM incentivizes procyclical, anticontrarian investing. Career risk compels PMs to invest in what is safe, not what they believe is best, and asset managers face the same compulsion in order to maintain their aum. Hence, closet indexing.
In other words, my perception is that most of the long-onlyindustry is structurally predestined to fail and is pretty much just pretending to be . If this is the case, I would have a hard time entering an industry like this, even if the career path looks pretty cushy on paper. Is my understanding of the industry wrong? Can someone make a compelling argument that traditional long only asset management actually does add value?