If the Market Is Efficient, Why Don’t I Just Bet on It?
Safe to say the year hasn't gone well for the market wizards. But reading this reminded me that this wasn't the first time the market's wisdom proved more difficult to beat than expected.
In 2007, intrepid hedge fund manager Walter Seides had a back-and-forth letter exchange with legendary value investor Warren Buffett. Buffett, long a pessimist of his profession's stated capabilities, had announced a wager during his last annual meeting: that a fund which tracked the US stock market would beat any group of hedge fund managers. With the amount of money they held, his rationale went, most of Wall Street were in fact the market. Seides agreed with Buffett generally but not specifically: surely a select few of unusually talented managers could consistently beat the market. So they decided on a bet for the two opposed investment approaches: Buffett would bet on ETFs and Seides would bet on 5 fund of hedge funds. 10 years later, let's see who wins.
The result was not even close. The Vanguard 500 Index Fund held by Buffett returned 125% over the decade, while Seides' fund of hedge fund holdings only returned 36%. Buffett happily announced the results during his 2017 annual retreat in Omaha, and on top of that gave his thanks to Jack Bogle, Vanguard's founder and the man who popularized the index fund.
So what does this mean for investors, whether institutional or retail?
For clarity's sake, let's steel man the other side for a bit.
There are hedge funds that have consistently beat the market. Buffett winning his bet against Seides doesn't negate their existence. Managers outside of hedge funds also can and have done so, like Buffett himself. But it's not just that talent-wise they are few and far between, the strategies hedge funds use have structural limitations. Statistical arbitrage for example has capacity issues with how much money can be deployed to exploit it, to the point that most stat-arb funds worth their fees are closed for new investors.
Coda: unless you're trading for a living, you get more returns by rebalancing occasionally (we're talking as rare as a year or so) or stick completely to the markets via index funds. this tracks with other stock markets too. look at my country's index for example, the IDX, year on year it goes up.