I take your point, but these âprofessional fund managersâ would outperform the indexâs on a more regular basis if this was true?
And anyone thatâs making there long term benchmark from March 2020 needs there head checked.
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Completely agree with March 2020 comment but for fund managers your looking at it the wrong way. The reason fund managers donât outperform is due to;
AUM drive, career protection and excessive focus on risk management. Fund managers arenât hedge funds and donât have the same freedoms, so typically are under the umbrella of a larger financial institution. Where there are several criteria for investing in companies (Liquidity requirements, ESG, risk profiles) plus they have over worked analysts who arenât incentivised to be bold. Try this exercise look at the concesus analysts target price over time - is it following the stock price or is the stock price following analysts target?
I personally find analysts(not always) upgrading target prices after the company have had a good year or after the stock price has increased. I remember this happened with vrigin galactic, palantir and InMode. Happens all the time itâs very funny when you catch it. Consensus target for virgin galactic went up to $40 after the rally then stock price tumbles and consensus goes down to $20 something. So which is it ? $40 or $20 something? Probably a bad example with virgin galactic but does happen with low beta stocks also.
Fund managers are also at the helm of their clients and potential clients. Drawdowns and client behaviour has a big impact on what they invest in. If your not paid a performance fee why would you attempt to outperform you just want to keep your job. So then the job is to get fair Sharpe ratio and keep clients happy. Imagine not being allowed to allocate more than 4% of your AUM to a high conviction stock youâve been all over for months because of your firms risk parameters.
As for hedge funds their sole job isnât always to outperform but to provide an uncorrelated return or alternative risk/reward investment (event arbitrage and absolute return strategies) this is means get a return no matter what the market does. Hedge funds also suffer from investor behaviour the most but with hedge funds they have to protect downside and require leverage to do so. Therefore itâs more baggage plus the number of large clients (accredited investors/financial institutions) who will pull money out of firm much faster than a normal fund. So thereâs higher career risk when managing other peoples money.
As an individual there a many benefits. If you have a proven process its actually becomes easy to outperform and overtime you should slowly deviate from market cap weighted indexes.
You donât even need your own process you can use Magic formula from Joel Greenlatt and hand pick 20-30 stocks a year from his website and you have a high probability of outperforming if you stick with it. The reason no one does it because its ugly ducking stocks - not your sexy story stocks.
However like I say find good investments yourself, donât rely on outside opinions, rely on your own research and the outperform thing should take care of itself.
Hope this helps, but for most people just investing in etf and indexes is good enough if they donât have the time or energy to learn. After all lot of people donât even invest at all 
.
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Very good response, but Iâm still not fully with you for 90% + of investors, and despite the shackles you speak of for fund managers, theyâd just be doing it if it was that probable, right?
Itâs obviously not impossible to outperform the market by any stretch, but over say a 30 year period thereâs evidence that suggests contrary to this. If youâre doing it over this period then fair play to you, if youâve been investing for 18 months and have built this opinion, then be careful.
For me, my pie of 5 stocks is up an additional 21% compared to my index pie. Am I pleased about this? Absolutely. Do I think that it can be maintained? Probably not, as the pie is catching them micro swings that are currently happening.
Maybe thatâs the way to do it? A nice blend of the two? Who knows though?
Itâs a pretty personal thing, and as you rightly say, the time required is absolutely immense. And in addition peoples emotional state needs to be considered when making investment decisions (which again, will lend most people to indexâs), peopleâs risk tolerances are another pro/con of out or under performing the market.
We can agree to disagree as thatâs what make the world go round!
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Would you rather earn a 0.3% fee on a fund that had grown to 10bn with a diverse underlining pool of investors that could better weather periods of underperformance to the markets through belief in your strategy backed up by performance history, or a 100m fund that had a 10% performance fee above a hurdle rate? There are a lot of investors that follow investment manager careers, and a lot of them care where they sit in the ranks of their peers. That and performance fees can hurt the revenue of managers as it eats away at the long term performance, to the point it should possibly only be used on small funds.
I agree with your analyst point, most are generally useless and give an opinion of where a share price might go, and are only right 50% of the time. This is the wrong way to perform stock picking. If you want to invest in a âclean energyâ theme, then look and compare companies within that space to each other. How they have been managed, how that has been reflected in their financials, and which companies have the drive, ability and funding to deliver growth.
I wish I could remember, but there was an interactive website a few years back that looked statistically over a number of different periods going back to about 1970. From this they discovered that less and less funds were outperforming their respective benchmarks over time. On average about 54% of funds consistently best their benchmarks, and less than 22% of private investors the same.
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Hope you guys take a deeper dive one day. I was the same when I started investing, I thought exactly the same thing.
The reports However are unfair, what funds are being compared? Equity funds? If so what ones and what are the goals of the fund? Are target date funds included? Surely no bond funds ? Why isnt this information appendix at the bottom of reports? Hedge funds being compared?
Hedge funds are completely different to what you think they are. For example most hedge funds have long/short strategy by nature its hard to outperform because some of your AUM is protecting downside. Plus the leverage used which helps amplify the spread between the long and short position. The benefit? Downside and drawdown limitation.
Also if a hedge fund has m&a arbitrage strategy, this is when they buy a target company that is rumored or in process of being acquired pre-m&a. They have quantified that the probability is high that the merger will happen when the merger completes their shares get bought by the acquiring company for a slightly higher price. This is thought to be one of the easiest ways to make money for hedge funds, Itâs a great risk / reward but the reward isnât the same as 10% a year. But the risk/reward relationship is massively better and provides a more âguaranteedâ income. This is what investors pay for.
Extract:
âIn summary, the value proposition of hedge funds is to have an attractive combination of these two asymmetries. These asymmetries allow high compounding of capital per unit of risk. These asymmetries can also be implemented through passive means. For instance, an equity long-only investor can buy put options to hedge his portfolio from falling when the market falls. However, in this case the investor compromises the return. The idea of a hedge fund portfolio is not necessarily to pay for insurance but to achieve these asymmetries through active risk management instead of paying for insurance that compromises returns.â
Some of the smartest people in finance and accredited investors, Why would they put money in if they know most hedge funds donât outperform. Because they know the reporting is amateur at best and isnât reflective of what their goals are. The reports are often published by brokers *cough *cough by the way how do they know what a hedge funds returns are itâs not public, they are published on databases that you need to be accredited for but even then not all hedge funds publish returns. So are the reports based on 30% 60% or 90% of hedge funds?
13F is limited to domestic listings, long-only and options contracts so this cant be relied on to calculate returns.
As for retail investors, @Jobloggs is right 90%+ wonât outperform. Retail investors are overwhelmed with information and tbh are quite lazy but the media is definitely no help and certainly there is no help from brokers. Only books and the community of other retail investors can help them.
The guy aiming for 60% returns 
. Heâs my hero tryna match renaissance technology medallion fund of 66%, the single best fund ever to exist. Imagine being so successful your fund gives back money to investors and closes its doors for new investors. At 66% after a few decades you wouldnât be able to move the money around without casuing movement which is probably why they stopped.
Also sorry for the long message.
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I respect this. 20 characters
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My return expectation is at least 20% per year, maybe even 30%. I am a risk-taker and invest heavily in few high growth stocks and moderately into crypto as well, so I think expecting a 20% is fine too.
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Should that not be 20% above something?
Assuming the whole world goes a bit Pete Tong next year as an example, could you reasonably expect to still hit +20%?
Or opposite direction, markets 
up 30% in general - should you still be happy if you only achieve 21%?
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I have a window of 5/7 years, maybe 10, where I would be happy to end with an average return of 20% per year, after that, will be going for a conservative approach.
Of course not, I would expect my portfolio to perform worse than the average, but I am fine with that, I have confidence in my picks, so as long as at the end I can achieve my return goal.
In that case, I wouldnât be happy, who would? I guess no one. I measure my portfolio using the S&P 500 as the benchmark too, as long as I can keep with it or beat it, I am happy.
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TBF I am happy as long as I beat my bank account⌠which shouldnât be hard because its 0% and does nothing to protect me from 2%+ inflation 
my last year was 20% returns, missing a chance at 40% or as much as 2x. this year I would like to hit 40%⌠but I am not making any deposits so it should be fun. just need to beat 6% to justify the costs of making a years deposits upfront instead of piecemeal over 12 months. next year, not going negative would be good should the market stagnate or drop on my head.
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15% pa is the baseline to achieve. 20% pa is the goal, beyond that then happy days.
FTSE All World is the best benchmark for me.
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8% PA is my target as this is what my calcs on retiring at 60 are based on.
Anything more would be great, but letâs hope we donât get a Japan moment in that time scale 
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Hmm, I am pleased when my conviction picks trail market, so I get more time to buy at discounted prices.
Am I a fool? 
Oh absolutely 
.
Itâs that balance from getting discounts and falling knives I guess, as there has to come a point when they stop being discounted and start being bad businesses.
If only you had a crystal ball, you could have bought in later 
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