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Old 11-17-2013, 09:40 PM   #21
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See my original post. I never said all. I said the odds are stacked against you. A lot of people THINK they have an actively managed fund that is outperforming when in fact they don't or the fund is simply taking more risk, which anyone can do on their own. Studies have shown that good past performance does not lead to any future advantage.
According to Carhart "Persistence in Mutual Fund Performance" (Journal of Finance, March 1997), there's actually A LOT of persistence from year to year. In fairness, Carhart's research includes some survivorship bias- he looked at returns over five years, but he was studying the correlation of returns- not the actual returns, so survivorship shouldn't have a large impact on the correlation of returns.

1 year persistence of alpha is very strong; five year persistence admittedly is a bit weaker.
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Old 11-17-2013, 11:23 PM   #22
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Originally Posted by IlliniProgrammer View Post
According to Carhart "Persistence in Mutual Fund Performance" (Journal of Finance, March 1997), there's actually A LOT of persistence from year to year. In fairness, Carhart's research includes some survivorship bias- he looked at returns over five years, but he was studying the correlation of returns- not the actual returns, so survivorship shouldn't have a large impact on the correlation of returns.

1 year persistence of alpha is very strong; five year persistence admittedly is a bit weaker.
This is not 1997 anymore. It was easier for managers to get a bit of a leg up on everyone else when news traveled slower and the Internet revolution hadn't sunk in. There's been more recent studies that tell a different story about the strategy of cherry picking funds or managers.
What mutual funds go out of business? More often than not it's the one's that under perform the market.
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Old 11-17-2013, 11:38 PM   #23
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This is not 1997 anymore. It was easier for managers to get a bit of a leg up on everyone else when news traveled slower and the Internet revolution hadn't sunk in. There's been more recent studies that tell a different story about the strategy of cherry picking funds or managers.
What mutual funds go out of business? More often than not it's the one's that under perform the market.
Do you have a more recent empirical study that completely contradicts this? This study is still commonly cited in academia, so it would just strike me as odd. More recently, apparently, Jan and Hung (2004) also find short-term persistence, well after the start of the dot-com era. Even more recently, Ammann and Huber, based on data from 1994 through 2008, find statistically significant alpha persistence at the 36 month level. At the 36 month level starting with data in 1994, that already puts you in 1997 for returns, so we already have the internet fairly well established along with the Motley Fool and these mailing lists. So **most** of this data is coming from the dot com era where folks are doing research on TMF and Yahoo Finance.

It was also incredibly expensive for ordinary investors to invest in the stock market prior to the days of online research as well, so much of the market participants prior to the $7 brokerage firms were professional money managers. Back in the early '90s, IIRC, if you lifted an ask on a non-round-lot trade, you'd round up to the nearest dollar on the stock price for the partial fill. Then you'd pay a $40-50 commission. (In the 1980s, it was a percentage of the stock price.) Most people just invested in mutual funds.

My sense these days is professional investors still have huge information assymetries with respect to ordinary investors. Trust me, when I was in trading in institutional brokerage, we had to trade against these firms. My suspicion if this study were run again is that the persistence of alpha will be just as strong but the magnitude of the alpha may be a tad smaller, but probably not an order of magnitude smaller.

I'm not saying you can necessarily make money off of this. I'm just saying that there's a lot of research to support alpha persistence in the short term (1-3 years).
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Old 11-18-2013, 02:06 AM   #24
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Do you have a more recent empirical study that completely contradicts this? This study is still commonly cited in academia, so it would just strike me as odd. More recently, apparently, Jan and Hung (2004) also find short-term persistence, well after the start of the dot-com era. Even more recently, Ammann and Huber, based on data from 1994 through 2008, find statistically significant alpha persistence at the 36 month level. At the 36 month level starting with data in 1994, that already puts you in 1997 for returns, so we already have the internet fairly well established along with the Motley Fool and these mailing lists. So **most** of this data is coming from the dot com era where folks are doing research on TMF and Yahoo Finance.

It was also incredibly expensive for ordinary investors to invest in the stock market prior to the days of online research as well, so much of the market participants prior to the $7 brokerage firms were professional money managers. Back in the early '90s, IIRC, if you lifted an ask on a non-round-lot trade, you'd round up to the nearest dollar on the stock price for the partial fill. Then you'd pay a $40-50 commission. (In the 1980s, it was a percentage of the stock price.) Most people just invested in mutual funds.
About a year ago I did a lot of digging around on the Internet and found an article about cherry picking funds. I'll see if I can find it. Not sure what search terms I used. I think Morningstar may have done a study.

This is not the study but here's a quote.
Go back through time and look at the returns of the top fund managers every year. In the vast majority of cases, a fund manager will be flying high for a year or two, riding a market trend. But after the markets have run their course, another investment style becomes popular, and last year’s heroes are this year’s goats. The indexer believes it doesn’t pay to try to guess who will be this year’s best performing manager.
Investing in Index Funds vs. Managed Mutual Funds
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Old 11-18-2013, 08:50 AM   #25
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About a year ago I did a lot of digging around on the Internet and found an article about cherry picking funds. I'll see if I can find it. Not sure what search terms I used. I think Morningstar may have done a study.

This is not the study but here's a quote.
Go back through time and look at the returns of the top fund managers every year. In the vast majority of cases, a fund manager will be flying high for a year or two, riding a market trend. But after the markets have run their course, another investment style becomes popular, and last year’s heroes are this year’s goats. The indexer believes it doesn’t pay to try to guess who will be this year’s best performing manager.
Investing in Index Funds vs. Managed Mutual Funds
Ok, but what factor model are they using? CAPM (just the S&P 500)? Fama-French? (3 factors). BARRA? (~70 factors, industry standard for hedge funds). There aren't a whole lot to choose from, but a good risk model is going to factor out the trends. After applying the factor model, you're left with alpha- and according to these studies, last years' winners on alpha are next years winners.

In any case, Carhart was able to prove persistence of alpha with simple CAPM, iirc, although it takes a lot of samples to filter out the noise.

Your website doesn't address that. Neither does it offer anything empirical to dispute the academic research.

I'd really encourage you to look the 2010 Ammann study over. I'm not saying alpha persistence makes actively managed funds worth the 100 basis points of fees- I'm just saying that we should always check our prior views against the empirical data.
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