Just How Useless is the Asset-Management Industry? - HBR

I think average HF returns were horrendously below S&P returns last year...

Well if everyone would invest in index funds, then there would be perfect correlation between assets. So some form of asset management is needed. The problem however is how to find the true alpha generators. I think the market share of active managed funds is currently too high. But active managed funds should always have a significant market share.

Indexing in fixed income worked pretty well when bond yields were in the double digits and then fell almost straight down for 30 years to less than 2%. I really don't see how that strategy is going to work going forward.

I had a professor who advocated index funds as well. It still shocks me that a well educated team of analysts who spend countless hours researching and analyzing companies cannot pick stocks that outperform the market.

I wonder how much of this is driven by management fees. If fees were removed, would actively managed funds have outperformed index funds historically? With all of the public information and valuation tools out there, it just doesn't make sense that actively managed funds can't beat the market.

Generally suspicious of the notion mutual fund managers add value (at least the vast majority of them). And with the rise of ETFs and index funds don't see why anyone would want to put their money with them anyways.

Over-diversification, diluted returns. An active fund has little chance of outperforming the market net of fees when they hold 200 stocks. "You can't beat the market when you are the market."

I'd bet on a portfolio invested in 10 solid companies over both index and active funds.

The level of WRONG with this idea... can't even begin.

portfolio management requires diversification... some asset managers can provide that.

now modern portfolio theory, while questionable, has the basic idea that adding assets that aren't perfectly correlated will improve ur risk adjusted return. this is essentially a "free lunch" becuz if u leverage up/increase exposure so ur risk is back to the original level, ur return is now higher.

but ya investing in huge mutual funds that track the index adds no diversification

HF returns on average were pretty low but AM is not useless. Rich people have to do something with their money.

And another thing to add: alpha generation at any cost is not necessarily what someone hires an asset manager to do. If you're a pension fund, your liabilities have a certain duration and exposure to various scenarios: more important than a return number at the end of the year is knowing that the mismatch between assets and liabilities is managed appropriately. Same for any number of other institutional clients.

Obviously everybody in the markets wants to come out with more money than they put in. But people want that achieved in different contexts and in different ways. To me, good asset managers are market experts who can make that happen, and who get paid for that service as much as for the ultimate return.

And by the same token, I wonder why so many people in the US use mutual funds to track an index. An ETF is probably gonna do it cheaper. And if you're saving up for something (eg retirement), a target date fund sounds like a better idea. But then, I'm not in the States and maybe there's a good reason.

what is this i don't even

Why does nobody ever talk about the risk side of the equation? When the market fell 38% in 2008, hedge funds outperformed by 20%. I would pay for that kind of downside protection even if that meant slightly underperforming every year. http://www.marketfolly.com/2009/01/2008-hedge-fund-performance-numbers…

Unlike some of the PMs who have posted in this thread I think this article does have some merit. Somewhere between what West Coast Rainmaker said, tax inefficiencies, and just bad players I'm gonna say at least 50% of PMs do not add value. This does NOT mean that it's impossible to beat the markets, but that like anything competitive the majority of players don't know how to make money, especially vs. the top 10% that actually know what they're doing.

I do worry about where the fee structure reaches equilibrium versus passive instruments since it affects what the above posters and myself eat but that's for another day.

If I ever do make it to starting my own shop in this industry I would probably make it a SMID equity or event-driven mutual fund with a soft close at $1B and number of positions capped at like 60.

MF with a soft close of $1B? Maybe if all your analysts are unpaid interns.