This graph is a depiction of how the investment management industry has evolved since the 1980s. Whats most obvious is that the dominance held by traditional funds (ie mutual funds) is being replaced by the index funds or passive investment approach. Also note the growing importance of alternatives. By alternatives we mean the alternative invesmtment management industry (specifically hedge funds, private equity etc). Under index funds we lump the growing asset classes devoted to commodities (including Crude, Gold, Silver, Agriculturals, etc).
Evolution of the Asset Management Industry
We think most investment advisors should abandon the desire to bringing the “best” in the investment management industry into their client portfolios. Time after time, we have seen mutual fund managers with stellar “alpha” capability get destroyed on a absolute and relative basis (Bill Miller of Legg Mason and Richard Pzena of the Pzena Value Fund are some examples). What about hedge funds? They never do any harm right? Wrong. Forgetting for a moment the obvious disasters like Madoff, there have been a string of “high-flying, hot shot” hedge fund managers that blew up rather spectacularly.
Some “meltdowns” to note of in the hedge fund world: Polygon Global, Platinum Grove, and Amaranth … which were forced to wind down after horrendous performance. A slew of other hedge fund disasters are “restructuring” their funds, something which to me sounds like changing around the terms so they can start charging egregious performance fees given they are years away from hitting their old “high water marks”.
Regardless, the range of investment options via low cost index funds is growing at a steady rate. For those eager to implement asset allocation strategies across various stages of the business cycle, futures or index funds are the way to go.
The Covert Analytics Team
