Credit: Brinson, Singer and Beebower

RumsfeldsReplacement: Bingo. The expected return is equal if you stay in one asset class.

The only difference between an index fund and an actively managed fund is the fees.

Well, not absolutely, as the graph shows. And of course, your comment should not be misconstrued as "Buy DIA AND RAKE IN MONEY LOLOL", but I'm sure it will.

I also await the "WSJ dartboard contest" citer, who doesn't read the actual returns and concludes that human asset allocation failed.

jayhawk88: So help a finance plebe out here...Why would you ever invest money into a hedge fund if your chance of making money is essentially the same as throwing it all down on a roulette wheel?

The reason why 75% aren't returning more than their fees is because their fees are so high, not because investing isn't returning them any money.

Tjos Weel: Treygreen13

DIA?

Its SPY that allows you to rake in the money!!!!3!

/Amused that market timing is smaller than "Other"

It is. I have the Brinson study printed out somewhere in my desk but can't find it at the moment.

If anyone wants to read the study, (which I doubt anyone will) it's:
"Determinants of Portfolio Performance II: An Update, Brinson, Gary P., Singer, Brian D. and Beebower, Gilbert L., Financial Analysts Journal, May-June 1991, pp 40-48"

At any rate, I think it's an argument for ETFs, rather than an argument that investing is risky as compared to gambling. Or monkeys, as the study mentions once as a throw-away line. There were no monkeys investing in this scenario.

Debeo Summa Credo: FTA:

"You couldn't make it up. Nearly half of all Fund of Hedge Fund managers, the academics report, delivered "negative after-fees alpha when benchmarked against the hedge-fund indices." In other words they couldn't even keep up with the index."

So if you look at all the hedge fund managers, nearly half of them couldn't beat an index comprised of hedge funds? Isn't that sort of a mathematical certainty, like half of all students score below the median score?

What am I missing?

The bolded part.

Rapmaster2000: A better question: why do people gamble?

Smart people gamble for entertainment.
Dumb people gamble to make money.

*note that this does not apply to games of skill, such as poker*

there their theyre: Hedge funds are doing exactly what they are supposed to. Generate large sums of cash for the managers. Fund does bad, oh well, give me my 5%. Fund does well, give my my 5% and 15% of the gains.

Nobody is forced to invest in a hedge fund. Hedge Fund Managers are the 1st round draft picks of the financial world - people are willing to pay a premium for the knowledge and guidance of a hedge fund manager and are (at times) rewarded appropriately... at times ludicrously. People with enough money to dabble in hedge funds are not investing their "double this or eat cat food forever" money in hedge funds.

It's the responsibility of a financial advisor to be sure that any client is suitable for an amount of risk they take on. There are (without a doubt) a number of sharks out there churning and burning their client's assets into nothing for their own personal gain, but reports like this (and industry/government wide reporting standards) can demonstrate to a potential investor the success or failure of a potential broker/hedge fund.

And there is a certain amount of "buyer beware" here too. If you (or anyone you know) want to invest a large sum of money, do your research and don't just blindly throw it at anyone in a suit.

Debeo Summa Credo: But the 'alpha' would be excess risk adjusted return compared to the benchmark return, with the benchmark being a hedge fund index, no? So my question remains - if you compare a bunch of funds to an index comprising those funds, wouldn't you end up with half of them providing negative alpha?

Oh, I see what you're getting at there. The article needs to be more specific here so we can find exactly what they're comparing.

Tjos Weel: But, they cant consistently beat the index by an amount greater than their fee, so you are generally better off with just going with the low-fee index instead.

And working with a professional/doing your research so you know which ETFs you want to be in, and why.

Plus, while we consider the Brinson study to show that asset allocation is the driving force, the other factors *do* add up to 8.55% of the returns and should not be ignored.

Debeo Summa Credo: As an aside, Is there even a low-fee hedge fund index to invest in? Wouldn't think that would be possible as you can't trade in or out of hedge funds at will.

I've never dealt with anything like that, although I imagine somebody offers it. You could probably try to replicate the performance of a hedge fund on your own, but they do get paid as much as they do for a reason... even if this article disagrees.

Why Yes I Am A Wizard: Hell, The Grand Martingale System would work as well (or better).

Stock trading is no better than gambling since people are irrational.

Well, it's only no better than gambling if you're irrational too.

Cue the Investor Sentiment Cycle.

Or, "Why you should be long in your financial dealings"