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I've just finished reading a Random Walk Down Wall Street by Malkiel, fantastic book. Now, I am sure in this forum I am preaching to the choir by asking "why active investing"? Study after study show that long term investment results are a factor of keeping expenses as low as possible, and asset allocation. Yet, looking in any newspaper or financial rag you see active fund after active fund touted, generally after it has run up in price.
Why hasn't indexing become part of the dogma yet? Why isn't it a huge chunk of the investment capital? How do people get fooled into buying active funds? Is it the gambling portion of our psyche? The part that says we can "beat the system"?
I've been reading about all these private equity acquisitions. These people believe they can beat the market by buying huge companies outright to change the management structures. Others are investing in hedge funds with OUTLANDISH expenses. I think the phrase is "2 and 20" which means, 2% of net assets, and 20% of any profits! Some of these hedge funds are (ab)using our court system to file claims against companies to try to reduce the stock price while shorting the stock.
So, besides for a long rant, do you believe it is possible to generate long term alpha? Or is this just a heyday for investment banks and hedge funds to find yet another sophisticated way of siphoning profits?
The more paranoid part in me thinks that it is a vicious circle. The magazines pump the active mutual funds, who then rich in management fees spend money advertising in their papers. The fund will get too large, not do too well, but all the fees collected will allow them to create another 20 funds. 3 of these will stick and make it to the next issue of the magazine. Rinse and repeat!
It is rare that any financial magazine will say "This fund has a beta of 1 to the S&P 500, so your money is better spent on a low-cost S&P500 index fund." So rare in fact, that I have never seen such a thing ...
/rant
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