Barry Ritholtz haas a great piece on Bloomberg.com about how active management is failing to keep up, much less beat passive management. I’ve often wondered having spent about 20 years trying to produce as much alpha as possible in a short amount of time (AKA trading) if there is less alpha to be created now that everyone has instantaneous access to the same information.
There was a time when having a Bloomberg terminal presented opportunities to make very easy profits just by receiving news before other traders, but since Regulation FD and Yahoo Finance those opportunities no longer exist.
Internet has leveled the playing field: How much information that once was the province of a select few is now in the hands of all?It was a huge game-changer when Yahoo message boards begin to fill up with posts from people doing legwork on individual companies. When someone reported that XYZ Tech’s employee parking lots were filled with cars 24/7 — including weekends — anyone paying attention understood that business was booming and that sales were going to beat investor expectations. For the few who grasped that, this was a period of large trading profits.This advantage exists only when a small number of people know what a large number of people are going to find out too late to act on. When everyone knows, the advantage disappears.
For his take on the reasons why active money management is failing to beat their benchmarks follow the link.
Source: Why Active Management Comes Up Short – Bloomberg View
The holders of the Sequoia Fund are adding insult to injury. The large Valeant Pharmaceuticals position held by the fund can’t be liquidated in an orderly manner so the fund holders who would like to exit are receiving shares of other holdings instead of cash.
Valeant Pharmaceuticals has gone from darling to pariah in less than a year. They’ve finally jettisoned the CEO, but are now facing off with bondholders over a technical default for not filing timely financials.
Investors can learn a great deal from the lesson. Financial engineering, serial acquisitions, and an aggressive management leads to disaster. Throw in a healthy dose of debt to pay for the growth and you have a powder keg ready to explode at the first sign of downturn.
Source: Sequoia fund gives departing shareholders stock instead of cash
If you’re even a slightly above average investor who spends less than they earn, over a lifetime you cannot help but get rich, if you are patient.
Stock exchanges are devouring each other because no one buys individual stocks anymore
Source: Stock exchanges are devouring each other because no one buys individual stocks anymore – Quartz
In a bull market you’re not as smart as you think you are and in a bear market you’re not as dumb as you think you are.
Source: Bull Markets vs. Bear Markets
Our bottom line result is that perfect foresight has great returns, but gut-wrenching drawdowns. In other words, an active manager who was clairvoyant, and knew ahead of time exactly which stocks were going to be long-term winners and long-term losers, would likely get fired many times over if they were managing other people’s money.
Question: if God is omnipotent, could he create a hedge fund that was so good that he could never get fired? No. It turns out even God would most likely get fired as an active investor.
Source: Even God Would Get Fired as an Active Investor – Alpha Architect
Liquidity in the biggest individual high-yield fixed income funds varies significantly from one portfolio to the next, according to an analysis by Fitch Ratings.
Source: Chief Investment Officer – High Yield’s Liquidity Conundrum