So the Hedge Fund manager says go index!
Thursday 25 September 2008
In the FT on September 20th, a leading US hedge fund manager, Jim Chanos, who manages $7bn, warned that the crisis would worsen and suggested investors avoid picking stocks and instead protect themselves by going into index funds.
What a sensible man!
Yet, on the same page in the FT, David Einhorn, who runs Greenlight Capital and manages the Greenlight fund, valued at $6bn, has returned above 20% per year for the past 10 years. That is without doubt an impressive record…..thus so far.
Credit where credit is due but the problem is that the focus by investors tends to be on past results rather than how the results were achieved. Let me explain...
Without doubt there are individuals who have an uncanny ability to make the right calls…actually they are bets in the stock market. Looking from the outside in, any investor would love to be part of Einhorn’s success, it’s only natural. Most investors would not tend to worry or care how he makes money just as long as he makes it (by that I do not mean printing it!)
However, for the majority of investors they will never get the opportunity to benefit from such a success story. How would any investor have known 10 years ago that Einhorn was the manager to pick? There were and still are hundreds of other potential Einhorns saying the same things but perhaps they are not winning as many bets. Then there is the incidence of luck to consider. If you ask 100 people in a room to toss a coin - at the end of the coin tossing, there will be someone who calls the coin toss right…but does that make him or her an expert coin tosser…actually the random events offer legitimate explanation for the expert coin tosser. Could the same be true for Einhorn. In other words, perhaps the incidence of success is not skill but random luck.
Whilst Einhorn may have a unique ability and there are no random events in his success, investors have another problem to face. Accessibility. If Einhorn has a reputation for delivering returns, through skill or luck, how do you get to invest your money with him? The answer is you don’t! Why?
Most investors have insufficient capital. I do not know what minimums he accepts or whether his funds are closed now, but if you manage $6bn, you do not want the administration of dealing with small sums to invest. By small I do not mean £10,000, perhaps even £1m may not be enough. A pension fund valued at $50bn could allocate say only 1%, which is significantly more than most private investors’ wealth and be more of a worthwhile investor for Einhorn.
For the average investor and by that I mean investors with up to £25m to invest, it is better following the advice of Jim Chanos. You increase your chance of success to probabilities of success rather than pure luck.
Here is a statement to confirm my point.
In the FT on September 15th, James Bevan, chief investment officer, of the CCLA, specialist investment management for charities, faith organisations, and local authorities said “The probability that you will get a decent return over a rolling 15 years from equities or real estate is reasonably assured. The expectation that you will definitely get an adequate return from a skilful manager over a 15-year view has to be zero because skill by definition has to be a zero sum game.”
So why take the risk of trying to pick a manager when the chances of success are better by buying the market. Of course an investor may say but I am not investing into hedge funds. I accept that point but the reference is to all active managers.
Categories: Index Funds
posted by Murray Round Wealth Management @ 09:44,
The Authors
Nicholas Round
Nic is the Managing Director of Murray Round Wealth Management Limited, who seeks to ensure the advice provided is truly independent. Based in Shropshire with clients local, national and worldwide, Nic has strived to find the best possible service for his clients needs, by researching and studying the market, trends and philosophies. Nic strongly believes Asset Class Management will bring his clients Financial Freedom, Independence and Happiness.
Kirsty
Kirsty is our communication guru. Managing information requires considerable due diligence and her passion for organisation gives the clarity we all seek. From Shropshire, with a Psychology Degree and much travelling, she is now back in Shrewsbury...and London often, keeping us all at Murray Round focused.
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