>> Funny enough, index funds outperform hedge funds, etc
I'm weary of reading this on Hacker News. Index funds do not beat hedge funds. That statement is devoid of nuance and accuracy, and contributes to a narrative that active managers do not have a skillset or function.
Most hedge funds do not maintain performance that beats the market, but many do. This is easily verifiable.
It's not at all meaningless, because it is rational to use past performance as a predictor of future performance.
Past performance does not necessarily indicate future performance, and it should not be the only predictor, but to dismiss a fund's history as inconsequential to its future is silly.
A fund's prior performance is a useful signal that can be rationally incorporated into a risk versus reward decision process.
>> it is rational to use past performance as a predictor of future performance
No, it isn't and all the funds explicitly warn you that you shouldn't do it.
The point is, funds perfomance is just a bad case of "survivor bias". Many funds are created, most of them tank and you never hear about them again, but few get lucky, make some remarkable return and get their 5 minutes of fame.
There is also one more problem with the "successfull" funds:
let's say that some fund manager actually has a secret strategy that works. At the begining, he or she just takes some initial money from investors and invest it in whatever the secret strategy suggests.
Unfortunately as soon as fund becomes popular, and people start putting more and more money in it the strategy gets thrown through the window. Why? because if you put your money in a fund that fund MUST use your money to buy stocks. Even if manager thinks that this is a bad time for buying.
Therefore, as soon as fund becomes popular it stops being strategy-based and becomes "bubble based" :)
The problem with managed funds is that the whole fund market is completely skewed by survivorship bias. Despite all the warnings not to do it, people do value funds based on past performance, and because they do that, fund managers eliminate funds with bad past performance, so the only funds you'll ever see in the market are ones with good past performance, but there's still absolutelyzero evidence that any of those funds will perform well in the future, because the actual performance is indistinguishable from random chance.
>Past performance does not necessarily indicate future performance, and it should not be the only predictor, but to dismiss a fund's history as inconsequential to its future is silly.
I'm not dismissing it unconditionally, but I'm not going to believe it unless I see the data. What's the probability of a fund outperforming given it has outperformed the year before?
The median index fund easily beats the median hedge fund after accounting for fees on both.
Are you more comfortable with that statement?
Also, here's another one to ponder: It may be just as hard to pick a fund manager who will outperform his/her peers as it is to pick a stock that will outperform its peers. For this reason alone, I index almost all my money.
I'm weary of reading this on Hacker News. Index funds do not beat hedge funds. That statement is devoid of nuance and accuracy, and contributes to a narrative that active managers do not have a skillset or function.
Most hedge funds do not maintain performance that beats the market, but many do. This is easily verifiable.