New Research Shows Majority of Investment Managers Not Adding Value
SAN DIEGO, Feb. 21, 2012 /PRNewswire-iReach/ -- It has been an ongoing debate for over two decades: do active investment managers (e.g., mutual funds and hedge funds) add value above and beyond simply investing in an index?
Sharath Sury, Executive Director of the Institute for Financial Innovation & Risk Management research think-tank (SIFIRM) and an adjunct Professor of Economics at the University of California, Santa Cruz, presented new data for this debate at the Investment Education Symposium in New Orleans last week. http://www.sifirm.net/About-Us.html
In a moderated session entitled, "The Future of the Hedge Fund Industry," Professor Sury highlighted research indicating that a majority of long-only equity managers, fixed income managers, hedge funds and hedge "fund of funds" contain significant broad market exposure that can be readily obtained by investing in much more cost and tax efficient index funds.
"We have known for some time that investment managers tend to closely match their benchmark indexes," Sury said. "What is surprising is that many hedge funds—and hedge fund of funds—are exhibiting similar patterns with high correlations to simple indexed investments."
Hedge funds typically charge a much higher fee (sometimes as much as 2-3% of assets under management plus an additional 20% of any positive performance), while fund of funds will assess additional fees. In many cases, these fees are not translating into value above and beyond what a simple combination of index funds may provide, according to Sury. Indexed investment fees are a fraction of the cost of actively managed funds, often ranging from one tenth of one percent (0.1%) to one half of one percent (.5%).
In an environment where institutional and private investors are experiencing low returns, obtaining value for every dollar in fees is of prime concern. Techniques such as Sury's "Alpha Cost Index (ACI)," published in 2006, helps investors measure this value. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1482904
There is cause for optimism. "In our study, some managers did indeed exhibit high, consistent skill and value," said Sury. "The trick is to weed out those who do not."
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