First off the total amount that Hedge fund managers make as compared to the total return to the investors in an index ETF is comparing apples to oranges. You really should compare the % returns if you are going to make this comparison at all.
As mentioned in the original NY Times article one hedge fund manager's "flagship fund gained more than 130 percent last year". That sure beats a 28% return of the market index.
Secondly, hedge funds such as SAC Capital, etc. themselves are constantly investing in indexes. They buy and sell index ETFs and their derivatives all the time. I'm sure if you asked them, "hey should we shut down the indexes?" the answer would be, "No."
Came here to say this, but probably less concisely; I'll also add that index funds are no different then a fund buying a 'basket' of stocks, except that it's accessible to the average investor.
'Ma can't buy & rebalance the S&P 500, but buying SPY ain't a bad way to do it [not that I'd be doing that today].
It's not meant to be an apples-to-apples comparison, just a reality check. One group of people made a ton of money by betting their reputations and working insanely hard. Another group of people made slightly more money, in the aggregate, by listening to a compelling jingle on the radio.
Of course hedge funds trade ETFs. They're really liquid. Most market participants can see why they immediately, directly benefit from investing in indices--the cost is collective. It is a little bit like dishonesty; we might all be happier if nobody lied, but everybody knows that they, personally, can benefit from telling white lies.
I'm not calling for index funds to be shut down. That would be counterproductive. I'm just suggesting that, in at least a Kantian sense, you feel bad about yourself if you invest in them.
I'm not calling for index funds to be shut down. That would be counterproductive. I'm just suggesting that, in at least a Kantian sense, you feel bad about yourself if you invest in them.
Wow, I really don't think you understand how a market works.
Just FYI, the point of an active investor is not to accumulate wealth, but to _concentrate_ wealth.
Divide the amount of money index-investors earned by the number of these investors and compare the resulting amount, by the "per-capita" earnings of the hedge fund managers.
Why am I even telling you this?!
I really only have read your piece under the assumption, that as an ambitious marketing professional, you had made a bet with a friend of yours, that you can make the financiers of this world buy-in a marxist-leninist philosophy, by playing on their natural greed ("that damn Joe Six-Pack earned more than I did with my Ivy-League education! The nerve!").
Otherwise I'm leaving Hacker News to start my own private investment consultancy firm.
First, we've been told repeatedly that the market is amoral. I am not willing to disadvantage myself when there are plenty of traders who would rob me blind if it meant a bigger bonus.
Second, most people trading in ETFs do not have the amount of money needed to get the necessary diversity from a basket of stocks.
That’s a strong defense of individual investors’ decisions to invest in index funds. But that excess performance is only possible if active managers are trading stocks. At some point, someone has to decide that one company is a buy and another company is a sell—if we all invested solely in index funds, share prices would move in lockstep (disregarding liquidity).
Its a self-correcting scenario. If that were truly the case, then people would start to trade actively, since trading actively would be an easy way to "beat the market".
This isn't even going to happen. There really are guys who can beat the market. Insider knowledge, or just plain old expert knowledge of a particular market sector. Not trying to beat those guys is a damn good advice. And those guys have no reason to quit.
The whole idea behind indexing is that it is extremely difficult to beat the market, so why not just buy the market.
One does not need to do "work" to invest in companies. You place a bet, and you make your return. If you want to bust your ass deciding what bets to make, that's your choice, but the markets would work quite well on their own.
That's the conventional view of indexing. But I'm arguing that it's akin to pointing out that it's very hard to pay more for Bittorrent than you do for Netflix, thus we should avoid paying for media we like.
"The Market" is the sum of the actions of individuals, some of whom are making actual, useful decisions. Can you describe how a market would work if everybody thought about it the way you're thinking about it?
Can you describe how a market would work if everybody thought about it the way you're thinking about it?
Why should I bother? Can you describe how the world would look if everybody just used drove diesels, or everyone stopped driving SUVs? None of these things is ever going to happen.
It's both true and obvious that buying index funds externalizes the cost of researching equities.
However, active investors engage in self-delusion that they can somehow beat the market. Unless they have highly rare insider information, this isn't true, and the top 25% of fund managers are simply that because the bottom 75% is other fund managers.
So it's your trilemma--delude yourself, externalize the cost of research, or watch inflation erode the value of your savings. I'm comfortable with my choice.
You're just annoyed that you made a bad decision with your money, and feel that someone else should shoulder the blame. Yet somehow it isn't the fault of the active investors who take all that expense cash in return for consistently unperforming; no sir, blame the indexers! Is this what your "Financial Advisor" told you while he was skimming 1-5% off the top?
In other news, Buggy Whip Owner Considers Cars Harmful (Possibly Evil).
First off the total amount that Hedge fund managers make as compared to the total return to the investors in an index ETF is comparing apples to oranges. You really should compare the % returns if you are going to make this comparison at all.
As mentioned in the original NY Times article one hedge fund manager's "flagship fund gained more than 130 percent last year". That sure beats a 28% return of the market index.
Secondly, hedge funds such as SAC Capital, etc. themselves are constantly investing in indexes. They buy and sell index ETFs and their derivatives all the time. I'm sure if you asked them, "hey should we shut down the indexes?" the answer would be, "No."
Here's the NY Times article: http://www.nytimes.com/2010/04/01/business/01hedge.html