Monday, July 13, 2009

Economists Make Prediction, Prediction is Correct!

How Smart Are the Smart Guys? A Unique View from Hedge Fund Stock Holdings

John Griffin & Jin Xu, Review of Financial Studies, July 2009, Pages 2531-2570

Abstract: Compared to mutual funds, hedge funds prefer smaller, opaque value securities, and have higher turnover and more active share bets. Decomposing returns into three components, we find that hedge funds are better than mutual funds at stock picking by only 1.32% per year on a value-weighted basis, and this result is insignificant on an equal-weighted basis or with price-to-sales benchmarks. Hedge funds exhibit no ability to time sectors or pick better stock styles. Surprisingly, we find only weak evidence of differential ability between hedge funds. Overall, our study raises serious questions about the perceived superior skill of hedge fund managers.


Luck versus Skill in the Cross Section of Mutual Fund Alpha Estimates

Eugene Fama & Kenneth Frenchm University of Chicago Working Paper, March 2009

Abstract: The aggregate portfolio of U.S. equity mutual funds is close to the market
portfolio, but the high costs of active management show up intact as lower returns to investors. Bootstrap simulations produce no evidence that any managers have enough skill to cover the costs they impose on investors. If we add back costs, there is some evidence of inferior and superior performance (non-zero true alpha) in the extreme tails of the cross section of mutual fund alpha estimates. The evidence for performance is, however, weak, especially for successful funds, and we cannot reject the hypothesis that no fund managers have skill that enhances expected returns.

Since both of these results are PRECISELY what economists would predict, I expect to hear a little credit from you nay-sayers.

What I don't understand is why universities wasted so much money on high-priced investment advisers. Hell, I could have lost 20% or more of Duke's endowment, and done it for HALF the cost.

Fact is, Ms. Mungowitz and I bailed out of the stock market for our 401k money in August of 2007. Now, that was not the peak, and for a while I felt silly. But converting all of our stocks into cash and short term gov bonds certainly "made" us a lot of cash, from November 2008 through February 2009. And I didn't charge us any fees at ALL.


Mr. Overwater said...

Congrats on that. I think that's the first time I know of that one of your predictions came true.

What made you decide to do that shift? What information did you base it on?

I've been thinking about shifting into more inflation-linked bonds, because (obviously this is why) I think we're going to have quite a bit of inflation in the next decade.

Mungowitz said...

Volatility in prices, and the huge volume. And, of course, it was pure luck, I realize that.

Yes, I agree, inflation is likely. But bonds of any kind may have trouble with inflation. Money market is safer...