If active managers’ fees were a country, it would have the GDP of Switzerland

The New York Times’s personal finance section gets a the jump on a State Street applied research report coming out Monday on investor habits and behavior. I’ll spare you the suspense – they find that people, pros and amateurs alike, are obsessed with finding alpha no matter what the cost and worry more about benchmarks or the performance of others versus their own personal goals (which are barely formed or quantified).

It’s the same conclusion reached by everyone who commissions a study of the industry. How many times do you need to read this or do I need to write it?

Partly, it’s the fault of human behavior and emotions., which can only be tamed for a little while in the aggregate but will always revert to insanity – their resting state. Partly, it’s the fault of an industry that feeds on fear, greed, envy and stupidity – it’s practically the most critical input for the entire fund complex.

Amongst the details in the article, this one stood out to me:

Yet the financial industry continues to search for alpha as if it were a great white whale. The study found that financial services firms spent 60 percent of their capital expenditures on resources to help generate short-term high performance. It is not for nothing: Active, as opposed to passive, money managers received $600 billion in fees in 2014, according to estimates State Street made from Boston Consulting Group’s Global Asset Management 2014 report. That amount is nearly equal to the gross domestic product of Switzerland.

That’s an awful lot of money going to an industry in which only 18% of actively managed mutual funds are beating their benchmarks this year (vs 30% in a typical year) and the hedge fund index is doing something like 3% so far in 2014 – 70 basis points behind US stock market or so.


The Folklore of Finance: Beliefs That Contribute to Investors’ Failure (New York Times)

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