PMs/ experienced asset managers, how confident are you really that you will beat the market/earn decent returns?

jsolow495's picture
Rank: Chimp | 6

I'm trying to understand how much uncertainty there really is in the market for someone with lots of training, lots of experience, and good judgement.

Do you go into your office thinking: "I'm reasonably confident I will be hitting my target returns as long as nothing crazy happens..." or is it more like "Though my team and I do the best analysis we can, we REALLY are at the whims of markets" or anywhere in between?

Do markets become more and more predictable the more training and/or experience one gains? Is there an upper bound and if so, where is the upper bound?

Comments (82)

Sep 20, 2013

interested also.

If the glove don't fit, you must acquit!

Best Response
Sep 20, 2013

Most are confident and most are wrong. Read this post and view the extreme confidence in the prediction. http://www.wallstreetoasis.com/blog/tsla-taxpayers...
Notice all of the facts and how well thought out the thesis seems?

Then go check a recent stock price.

Granted, this isn't written by some PM with tons of experience, but it's basically the same mindset for most people that pick stocks for a living.

    • 3
Sep 26, 2013
DickFuld:

Most are confident and most are wrong. Read this post and view the extreme confidence in the prediction. //www.wallstreetoasis.com/blog/tsla-taxpayers...

Notice all of the facts and how well thought out the thesis seems?

Then go check a recent stock price.

Granted, this isn't written by some PM with tons of experience, but it's basically the same mindset for most people that pick stocks for a living.

Without supporting either side in the argument, i don't think your argument is correct, tsla will play out over years near term performance doesn't tell you anything.

Also you would expect to be wrong on a lot of your pick given even getting it right 60pc I the one is doing pretty well...

Sep 26, 2013
leveredarb:
DickFuld:

Most are confident and most are wrong. Read this post and view the extreme confidence in the prediction. //www.wallstreetoasis.com/blog/tsla-taxpayers...

Notice all of the facts and how well thought out the thesis seems?

Then go check a recent stock price.

Granted, this isn't written by some PM with tons of experience, but it's basically the same mindset for most people that pick stocks for a living.

Without supporting either side in the argument, i don't think your argument is correct, tsla will play out over years near term performance doesn't tell you anything.

Also you would expect to be wrong on a lot of your pick given even getting it right 60pc I the one is doing pretty well...

"The market can remain irrational longer than you can remain solvent."

Maybe the word "wrong" is a little assuming, but I don't think that the sentiment is wrong at all.

Sep 26, 2013

I might agree with you in certain instances, but not when someone has shorted a stock that's up 400% in less than a year. The fund investors are feeling the pain of that decision now.

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Sep 21, 2013

I am reasonably confident over a reasonably large sample, but have zero expectations for a particular single period of time.

Sep 21, 2013
Martinghoul:

I am reasonably confident over a reasonably large sample, but have zero expectations for a particular single period of time.

Great statement. Haven't heard it before.

The more successful managers realize that they don't have any control on how their investments work out. It could be a few years before your some of their best ideas work out. There's not much you can do in terms of performance when your a long-only guy and an '08 comes along. All you can do is buy and wait.

Sep 27, 2013

Could you elaborate on other managers and your reasoning about being confident over a large sample. What kind of HF are you in btw? im guessing different than L/S?

Sep 28, 2013
Fetter:

Could you elaborate on other managers and your reasoning about being confident over a large sample. What kind of HF are you in btw? im guessing different than L/S?

I can't talk about other managers at all.

My reasoning is based on my view (possibly incorrect) that my investment methodology generally produces superior risk-adjusted returns, after transaction costs. I have reasons to believe that my view is more than just wishful thinking. However, like any other market participant, I have no way of guaranteeing that at any given moment in time my portfolio won't experience a drawdown.

I do interest rates (fixed income and FX, mostly), with a predominantly relative value focus.

One thing I'd like to add is that the idea that one can easily outperform the index because of "optionality" is absurd.

Sep 28, 2013

I meant to comment on this comment by Martinghoul earlier. In my opinion, this is the best possible response by someone who manages money for a living. This is analogous to card counting, on any given hand, the edge is barely noticeable, but over time, the odds are good for outperformance. Now, I don't know Martinghoul or if he's any good (obviously, I've never even met him or know anything about him), but at a minimum, he has a humble enough attitude to counteract the tendency for people to be overconfident. Overconfidence has been the root cause of every major investing blowup that I know about. In reading some of his other posts, i believe this guy consistently displays the right attitude about managing money.

PS -- this attitude is a good thing, but, even with the best attitude, this business is very difficult. Everyone you buy from is selling for a reason, maybe it's not the same reason that you're buying, but it's important to keep in mind, that virtually nobody who trades in size is a dumb person in 2013.

Sep 21, 2013

From a fixed income perspective, it's pretty fucking easy. Like... If you have a diversified portfolio and can't beat the Barclays agg or whatever benchmark you're using, you're a pretty shitty trader..

Think of it this way - as an active trader/PM you always have an advantage over indices because you have optionality, right? Optionality has value, so your base case shouldn't be the index, it should really be the index plus the implied derivative. Since the value of the derivative is a positive non-zero number, the value of the index plus the derivative is greater than the value of the index on a standalone basis, so base case you should beat the index.

Base case you should beat the market, pretty much by definition.

    • 3
Sep 21, 2013

Huh? If it's so easy for a fixed income manager to outperform, then why do almost no fixed income managers (properly benchmarked) actually beat the Barclays Agg? What optionality does a manager have that the index does not? What you're writing makes no sense.

Most people consider high grade fixed income the most difficult asset class to be an outperformer.

    • 1
Sep 21, 2013
DickFuld:

Huh? If it's so easy for a fixed income manager to outperform, then why do almost no fixed income managers (properly benchmarked) actually beat the Barclays Agg? What optionality does a manager have that the index does not? What you're writing makes no sense.

Most people consider high grade fixed income the most difficult asset class to be an outperformer.

Define "properly benchmarked." Do you really believe that "almost no fixed income managers beat the agg?" Let's use our brains for a couple seconds and just logic through this. Think of all te NIM businesses in the world - banks, funds, insurance... Those guy are all buyers of fixed income to match against their liabilities, right?

Naturally, based on like "accounting 101: intro to not being fucking retarded" level shit, your balance sheet has two sides. Economic theory would predict that the sellers of the liabilities/purchasers if funding would bid up the cost of funds to the point where they would be indifferent trading it not, which arguably could be their book yield minus some dr minimus epsilon. So if you're assuming they can just buy the agg, you're assuming they can get paid the agg returns, which sets a floor on their total returns, so theoretically cost of funds should be bid up to that floor.

So if you're going to try to argue that NIM businesses underperform the agg (and by extension their cost of funds) as a rule, aren't you kind of arguing that like... Banks and insurance companies are insolvent on a massive global scale? Because like... If you fund trades at the agg and can't beat the agg you've got negative margin right?

So yeah, I disagree with you and stand by my theory that the optionality of an actively managed portfolio has value in and of itself which makes actively managed portfolios inherently more valuable than indices because you have this like, free call essentially,

As far as your high grad fixed income point, there's a huge difference between the universe if fixed income securities and the universe of OF corporates. Performance of IG corporates is not necessarily meaningful to my point about the broader world of fixed income.

And just anecdotally, I'm a fixed income manager and I'm pretty sure I would get fired if I were consistently outperformed by the agg. We all beat it as a rule.

    • 1
Sep 21, 2013

Studies suggest that most active managers don't have enough actual investment skill to cover their costs, they stay afloat through luck...

Courtesy of the good ol' Fama-French paper:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id...

Sep 22, 2013

This is so wrong.

Sep 22, 2013
sampsonpoint:

This is so wrong.

I don't even know where to begin.

Sep 22, 2013
sampsonpoint:

This is so wrong.

Ha - and the sky is green. Opinions are like assholes, right? Anyone cam say whatever they want, but if you cant back it up with any kind if argument its irrelevant. If you've really got a lot to say, you should respond for my benefit and the benefit if anyone else reading this.

I've already learned that munis are excluded from the agg, right? maybe I'll learn something else. As of now I still believe in my major points.

Sep 22, 2013

Guess ill start from the top.

First of all it's incredibly different to best the benchmark. A good year constitutes beating the benchmark by 200 basis points (2.0%). You do this every year for 3 years and you're a rock star.

Your argument about optionally is incorrect and logically flawed. I don't really understand it.

If there's some "positive implied derivative", a free lunch, then I'd like to know how to get that.

Sep 22, 2013

There are hundreds of taxable munis in the agg...

Sep 25, 2013

all the big names get their money out of their influence and cornering the market etc.

Sep 26, 2013

If the agg is the average performance of all securities--and thus the average capital-weighted performance of all institutions who own securities (before fees)--then surely half must win and half must lose relative to the index, since it must tautologically be the average. Not sure I quite understood the whole bit about optionality etc. But if what the 'fixed income PM' says with regards to ALM management in FI markets is that some players make 'dumb' trades to match liabilities, then maybe he thinks 'optionality' is what lets them take the other side of it. Still, if alpha relative to a benchmark is zero-sum, all this seems to make no sense. The "obvious" trends...if only the clairvoyance came to us all. Until then beating the market will be the half-gamble, half-race that it is

Sep 26, 2013
SlyGuy:

If the agg is the average performance of all securities--and thus the average capital-weighted performance of all institutions who own securities (before fees)--then surely half must win and half must lose relative to the index, since it must tautologically be the average....

Average Median, so the 50% under/over performing claim isn't necessarily true.

E.g. could have fewer players really outperforming, exactly offsetting a larger pool of players slightly underperforming.

Sep 26, 2013
SlyGuy:

If the agg is the average performance of all securities--and thus the average capital-weighted performance of all institutions who own securities (before fees)--then surely half must win and half must lose relative to the index, since it must tautologically be the average.

I'd say this is true most of the time, but the only thing that your investors are concerned with is your performance net of all fees and transaction costs. I don't know exactly how the Agg is priced (whether they use most recent bids, mid points, or matrix pricing for bonds that haven't traded recently), but if you're in the market buying and selling these bonds, you will be paying a bid ask spread. So, you're at a disadvantage before you even take into account management fees. Considering that probably 90% of high grade fixed managers will be plus or minus about 1% point from the benchmark in any given year before fees, it's easy to see how few of them can beat the benchmark when you take another 50-75 bps in mutual fund expenses out of the returns. It's a hard space to add value. Honestly, do you think someone is going to add significant value to buying Treasuries? This is why most big endowments will buy these securities themself instead of outsourcing. Even when they outsource, they'll beat the shit out of the asset manager and get the fee down to single digit basis points for separate account fixed income management. It's just a shitty backwater of the asset management business. If you want to be in asset management, find another area.

Sep 26, 2013
DickFuld:

If you want to be in asset management, find another area.

Not to be a dick but this is 1) True and 2) The reason for the last financial crisis.
IG Corporates are closer to Govt and Munis. Fundamental HY Corporate can get very close to Fundamental equity.

Sep 26, 2013

For instance, NYCbandar...how obvious was the Fed's prolonging of QE last week? Surely you positioned your portfolio in advance of the inevitable and laughed at those who didn't

Sep 26, 2013

Great thread

Sep 26, 2013

Bandarji ne DickFuld ki faad di :D

Sep 26, 2013

unhedged every single year

Sep 26, 2013

I love this thread :)

Apr 18, 2014

apologies to others in the thread, didn't bother to read your responses. I'd recommend everyone interested in this read books about handicapping, poker, the kelly criterion, etc., such as fortune's formula by william poundstone. we use target returns, and we aim to be a few percentage points ahead of inflation with half the vol of the s&p. there is tons of uncertainty in the marketplace, but you simply try to minimize your mistakes. in my mind, the best way to do this is to be a value guy with a contrarian tilt. the reason is that markets will always be irrational, ever since markowitz and fama came on the scene pre-vietnam, people have been trying to make finance and economics into a hard science like bio, chem, or physics, where the rules are written in stone. in financial markets, you have real people, emotions, attitudes, different goals, etc. because of this, most finance teachings (emh, mpt, capm) in college and even CFA are wrong. if you have a large pool of irrational and shortsighted people making decisions with money, sooner or later, and more often than not, they will be wrong. it is at that point you can make money consistently, and at no other time. I'm not saying that value investing and being contrarian are the ONLY ways to make money, I just believe they're the only ways to make money consistently. you could have made money buying TSLA & NFLX at the IPO, just like you could've made money buying yahoo in 96 and selling it december 99, but these situations are not only few & far between, their results are detached from their fundamentals. to answer your question directly, I do not concern myself with uncertainty in the marketplace, I focus on what I can control. I can control the level of risk I am taking, I can control the quality of companies I select, and I can control the margin of safety I allow. if I do all of those well, I am confident I will beat the goals I have for the portfolio (we don't try to "beat the market," because in our case it's apples & oranges). regarding your question about markets becoming more predictable, always remember that the more things change the more they stay the same. people will always be irrational, they will always say "this time it's different!" and this will always leave opportunity for those who are patient and liquid. as you gain experience, you gain wisdom, patience, and hopefully liquidity.

Apr 19, 2014

Is your enter/return key broken?

As for your post, I fully agree but do not possess sophisticated training.

factualbill:

apologies to others in the thread, didn't bother to read your responses. I'd recommend everyone interested in this read books about handicapping, poker, the kelly criterion, etc., such as fortune's formula by william poundstone. we use target returns, and we aim to be a few percentage points ahead of inflation with half the vol of the s&p. there is tons of uncertainty in the marketplace, but you simply try to minimize your mistakes. in my mind, the best way to do this is to be a value guy with a contrarian tilt. the reason is that markets will always be irrational, ever since markowitz and fama came on the scene pre-vietnam, people have been trying to make finance and economics into a hard science like bio, chem, or physics, where the rules are written in stone. in financial markets, you have real people, emotions, attitudes, different goals, etc. because of this, most finance teachings (emh, mpt, capm) in college and even CFA are wrong. if you have a large pool of irrational and shortsighted people making decisions with money, sooner or later, and more often than not, they will be wrong. it is at that point you can make money consistently, and at no other time. I'm not saying that value investing and being contrarian are the ONLY ways to make money, I just believe they're the only ways to make money consistently. you could have made money buying TSLA & NFLX at the IPO, just like you could've made money buying yahoo in 96 and selling it december 99, but these situations are not only few & far between, their results are detached from their fundamentals. to answer your question directly, I do not concern myself with uncertainty in the marketplace, I focus on what I can control. I can control the level of risk I am taking, I can control the quality of companies I select, and I can control the margin of safety I allow. if I do all of those well, I am confident I will beat the goals I have for the portfolio (we don't try to "beat the market," because in our case it's apples & oranges). regarding your question about markets becoming more predictable, always remember that the more things change the more they stay the same. people will always be irrational, they will always say "this time it's different!" and this will always leave opportunity for those who are patient and liquid. as you gain experience, you gain wisdom, patience, and hopefully liquidity.

If the glove don't fit, you must acquit!

Apr 19, 2014

Haha nah not broken I just don't pay attention to grammar on a forum where "throw monkey shit" is an option, appreciate your kind words though

Apr 19, 2014

wow. daniel loeb and david tepper are crushing it.

Apr 19, 2014

They should just take a vacation for the next 9 months.

Apr 19, 2014

what was your beta?

Apr 19, 2014
philliesphan:

what was your beta?

*alpha

Apr 19, 2014

is alphaClone legit?

Apr 19, 2014

www.gurufocus.com

another site where u can access more for free

Apr 19, 2014
juklano:

www.gurufocus.com

another site where u can access more for free

i really like this site, thanks so much juklano. appreciate it :)

Apr 19, 2014

I'd say, what was your Sharpe ratio.

Apr 19, 2014

too much detail guys... you're missing the point. forget sharpe ratios and alphas... trying to be a smartass is great in the office but not needed here, as i never asked for this!

just asked for a basic return. (i.e. ending price / beginning price - 1)... out pops a percentage.

you are correct in saying alpha is a good way to see the risk-adjusted return compared to the index but not needed here...

Apr 19, 2014
bankertohk:

too much detail guys... you're missing the point. forget sharpe ratios and alphas... trying to be a smartass is great in the office but not needed here, as i never asked for this!

just asked for a basic return. (i.e. ending price / beginning price - 1)... out pops a percentage.

you are correct in saying alpha is a good way to see the risk-adjusted return compared to the index but not needed here...

Well the topic was did you outperform the market, hedge funds etc. If your return was higher than the market because you took on much more risk then you didn't outperform anything. I'd like to see a nice clean sharpe ratio to go with the returns...not asking too much.

Apr 19, 2014

"Harbinger Capital Partners"

haha a little bit morose, even for a hedge fund.

Apr 19, 2014

Thanks for the mentions everyone. The stats posted above seem like they are for the Top 3 Holdings strategy for each of those managers. That strategy invests in the three largest positions disclosed by the manager each quarter. Free guest pass members can view backtests for that strategy as far back as 2000 and for any manager (e.g., Berkshire, exc). You guys might want to check out our blog as well - it can help folks understand our service better http://blog.alphaclone.com. BTW, the portfolio's volatility (ie beta, sharpe, standard deviation) is relevant especially when a portfolio holds relatively few stocks (like the Top 3 Holdings strategy). Our platform allows you to backtest about a dozen strategies for any of 300 managers, you can even combine managers into groups (fund of funds) and "clone" their collective intelligence http://blog.alphaclone.com/alphaclone/fund-groups-...

Apr 19, 2014

Diversification is for losers

Apr 19, 2014

very insightful....

Apr 19, 2014

Using that logic, I should just quit Wall Street and try to get into a comfortable government job.

Apr 19, 2014
John_McClane:

Using that logic, I should just quit Wall Street and try to get into a comfortable government job.

I think you missed the point. The job thing was just an analogy for the stock market.

He is pretty much saying it is far better in the long-run to buy PG stock, then to buy lnkd and fb's of the world.

You could find the next aapl but the odds are against you.

Because when you're in a room full of smart people, smart suddenly doesn't matter--interesting is what matters.

Apr 19, 2014

Dumb advice.

Apr 19, 2014

with this quality of work and insight OP will resemble the 2nd twin more than the first

Apr 19, 2014

Just covered the efficient market hypothesis in class today. I'll be opening a Roth in the next month or so, is it a bad idea to start with a few solid dividend paying stocks?

Studies have shown over the past 70 years that only about 10 percent of money managers have beat the market in any given 10-year period.

I'm too drunk to taste this chicken -Late great Col. Sanders

Apr 19, 2014

so put your money in a low cost total market index fund and call it a day :\

Apr 19, 2014

Tenuous analogy.

Apr 19, 2014

the third twin (aka triplet) dropped out of MBA school, spent a couple months inventing some instagramesque app which sold for $500mm.

then he took a dump on the other brothers' lawns and went back to his penthouse to get high with his playmate girlfriend

Apr 19, 2014

yes beta exposure is more important than generating alpha

Apr 19, 2014

Why the industry is obsessed with beating the market: Consider the fact that without beating the market, a fund manager provides NO VALUE ADD. Why would I pay someone 2% management fee to "match" the market. Hence the industry designed this rule to help sell their investment services. However, it is important to understand that the market is comprised of a collection of stocks which in aggregate make up the broader economy.

With index-funds you free-ride people who paid active managers to do the price discovery. If the world suddenly got rid of all the active managers, it would not work. So I disagree that a fund manager provides no value add.

If you like a the beverage market, you should strive to own the best companies in that industry

Not only you contradict yourself that you should not attempt to pick the best companies, but your argument sounds like we are in 1970s.

Their excutives make top dollar to sit and think of ways to grow the company and make it more profitable. These executives aren't stupid. Over time, they will find ways to grow the bottom line

They will make each of us drink 2 litres of cola every day for sure.

This logic of buying brand companies is obsolete. At a low enough price everything is attractive. Are you really a 2nd year corp fin associate? I thought you were first year undergraduate.

Apr 19, 2014

This thread reminded me of this article by William Sharpe.

http://www.stanford.edu/~wfsharpe/art/active/activ...

However, I have to admit that I did not follow your logic towards the end.

Apr 19, 2014
Im not very creative:

However, I have to admit that I did not follow your logic towards the end.

That's because it does not exist

Apr 19, 2014
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Apr 19, 2014
Apr 19, 2014
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