Tags: mutual | fund | managers

Active Fund Managers Can't Beat Index Funds

By    |   Thursday, 03 Dec 2009 07:59 AM

They can’t beat them unless they’re lucky.

Active mutual fund managers, no matter how smart or skillful, can’t top the return of index funds -- most of the time, anyway, according to a recent study.

The new study by a pair of noted finance professors revealed that “it’s impossible to tell whether a (mutual fund) manager has performed well due to luck or skill – which means that it’s also impossible for an investor to know for sure,” said the study, according to a MarketWatch report.

“People don’t understand the effects of chance (on returns),” said Eugene Fama, who conducted the study with colleague, Kenneth French. Fama is professor of finance at the University of Chicago Booth School of Business. French is professor of finance at Dartmouth College Tuck School of Business.

“It’s impossible to tell how big an element chance is in (good fund performance),” said Fama.

The Fama-French study ran 10,000 simulations of actively managed funds and examined their yields.

Results showed that other than the top three percent of the funds, active fund management fell behind returns that would be generated by luck alone.

Conclusion: Pick index funds over fund managers trying to beat the market.

Still, major investors are attracted to managed funds.

One of the biggest hedge fund start-ups of the year was recently announced by four founding partners of Citigroup’s Old Lane hedge fund.

The new fund, Meru Capital Group, capitalized at $300 million, will trade stocks, currencies, derivatives and debt, according to The Wall Street Journal.

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They can’t beat them unless they’re lucky.Active mutual fund managers, no matter how smart or skillful, can’t top the return of index funds -- most of the time, anyway, according to a recent study. The new study by a pair of noted finance professors revealed that “it’s...
mutual,fund,managers
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2009-59-03
Thursday, 03 Dec 2009 07:59 AM
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