Inevitable Automation Of The Fund Management Industry Is Upon Us
first published on Seeking Alpha Jan. 6.17
Why do human fund managers still exist?
This might seem like an odd question, but in light of a range of critical factors, some old but many new, there is very little economic rationale for these managers to exist, except perhaps in rare cases.
For starters, there is the poor or at best average historical performance of most discretionary fund managers, including alternative managers such as hedge funds and private-equity houses, certainly on a risk-adjusted basis. Much economic research has continually proven the rather harsh adage that having someone throw darts at a list of S&P 500 stocks produces the same result as that of the average fund manager.
To put it another way, very few fund managers outperform the market in the medium to long term. But given the difficulty of trying to predict the future, this isn’t really something that any mortal fund manager could really expect to do.
But more recently, other factors have come into play. There is the sheer ubiquity of fund managers, again including hedge and PE funds.
Once upon a time, there was the odd unique hedge fund or unique PE fund such as KKR, but there are now innumerable both mainstream and alternative managers chasing yield in a very low-yield environment. This causes a peculiar statistical problem for any investor when choosing a fund manager.
Because there are so many fund managers from which to choose, including even alternative managers, how can we ever get sound empirical evidence that one fund is outperforming another? For example, if a hedge fund manager purports to have even 10 years of superior returns or apparent alpha, what does that even mean in this day and age?
As is commonly noted, if 5,000 people are tossing coins, some, just by the natural laws of probability, will get 10 heads in a row. Of course, this doesn’t make the lucky coin tossers any different from the others or any more likely to get a head next flip around.
Some fund managers may indeed be better performers than others, but the issue is how can one empirically prove that?