Friday, September 5, 2014

A Rising Tide Doesn't Lift All Boats

Goldman Sachs: Why Stock Pickers Have Suffered a Really Bad Year

Just saw this article this morning on how only 23% of large cap managers have outperformed the S&P 500 this year and how the average hedge fund is up only 2%.  There are a couple of things that investors should read into this:

1. This year is different than last year.  Last year was pretty much straight up, at least in the US, so anyone US focused had a good year.  This year is different as there has been so much going on beneath the surface---small and mid cap under performance, momentum stocks getting killed, etc.

2. Because we are seeing so many divergences this year and so much going on beneath the surface, buy and hold investors should be real nervous as this could be a signal a top is near.  Tactical investors have no reason to fear tops.

3. Comparing a money manager to the S&P 500 is only valid if that money manager invests like the S&P 500.  There are a bunch of money managers who are closet indexers who pretty much try to track the S&P 500, for those guys comparing them to the S&P is valid.  Hedge Funds and other flexible managers can't be compared to the S&P because they have the ability to pursue absolute returns (unlike the closet indexers who ride the market up and down).  These guys will usually under perform at time of high risk and at speculative tops because they will take some money off the table.  This is ok because they will tend to make it back, and then some,  when the market crashes.

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