PDA

View Full Version : Large money flows, mutual fund withdrawls, and money manager performances



nickola.pazderic
06-26-2011, 02:08 PM
Hi Billy and Pascal and everyone,

I read the "fight club" at Zero Hedge regularly. One very interesting and relevant post (http://www.zerohedge.com/article/peak-portfolio-manager-frustration-goldman-weekly-chartology-update) concerns large money flows out of mutual funds and the frustrations of money managers. I'll quote its quotation of a GS report, in the spirit of fair use:

Goldman's David Kostin puts it in the his latest weekly chartology, "Frustration is clearly evident across the portfolio manager community. The S&P 500 has returned 3.0% YTD compared with 2.7% for the typical large cap core mutual fund and 1% for the average hedge fund." It gets worse: "Investors of all styles are lagging their benchmarks. With just a week to go before mid-year, 78% of the large cap growth mutual funds are lagging the 3.6% return of the Russell 1000 Growth Index by a median of 150 bp. Similarly, 63% of large-cap value mutual funds lag the Russell 1000 Value index. Just under half (49%) of core funds are underperforming the S&P 500.

And:

The levered investment community is faring no better than long-only institutions. The typical hedge fund has returned roughly 1% YTD. However, capital is still flowing into absolute return strategies as evidenced by our conversations with pension funds, endowments, and family office representatives attending two recent Goldman Sachs Capital Introduction events in New York and Rome. In contrast, mutual funds have experienced outflows totaling cumulative $6 billion during the past two months.

I see from the Robot's back test in 2008, that it faired very well under periods of cummulative withdrawls. I assume that while cummulative withdrawls from mutual funds is of interest, the final say will be in the tick by tick signals picked up by the EV programs. Is this a correct assumption?

I am nonethess fascinated by the mass underperformance of the so-called "smart money" (that is, the money flow that EV tracks). Apparently this smart money is not so smart after all. But how is it dumb? I assume it is dumb because it is large and slow. Moreover, the authors at Zero Hedge argue they are are sheep; John Thomas, "the Mad Hedge Fund Trader" has said the same.

It is noted in some comments that I suffer beginners luck, and this may be true. But based on the returns, I would qualify as a fund manager. Such a realization sets a red flag: Are our returns and expectations for returns (based, for example, on the performance of the Robot) unrealistic? Or do sharp minded individual speculators inhabit a different universe of some sort, where different laws and expectations can apply?

Aside from me, I have seen no one publicly state their returns, and I think this is reasonable. They probably vary widely. And while we share a goal, that is probably sufficient for working loosely together. Nonetheless, I'm curious what others think about the situation of fund managers in our current flat market environment?

Lastly, I'd like to direct this question to Billy and Pascal: Do you consider large in/out flows of captial into the system in any way aside from the tick by tick signals? Can either of you comment on fund managers and how they adapt to this difficult situation?

Billy
06-27-2011, 01:30 AM
Aside from me, I have seen no one publicly state their returns, and I think this is reasonable. They probably vary widely. And while we share a goal, that is probably sufficient for working loosely together. Nonetheless, I'm curious what others think about the situation of fund managers in our current flat market environment?

Lastly, I'd like to direct this question to Billy and Pascal: Do you consider large in/out flows of captial into the system in any way aside from the tick by tick signals? Can either of you comment on fund managers and how they adapt to this difficult situation?

Nickola,

We don't really care about people publicly stating their results as there is no way to check the truth or lies. Once and for all, my own performance is now in line with a triple leverage IWM robot trading with 100% of my accounts since mid-March or + 13.5% and I have no intention to come back to discretionary trading soon.

About the mutual funds outflow, I will simply quote Ryan Detrick as I am in full agreement with his views at:
http://www.schaeffersresearch.com/commentary/observations.aspx?ID=106889&trackback=recapezine

"On the sentiment front, numerous indicators are displaying the kind of heavy-handed pessimism that has coincided with previous buying opportunities. Now, this doesn't count for much until the overall price action improves -- but it does suggest we have some wood for the fire should we start to bounce.

For starters, investors continue to take money out of domestic mutual funds at a near-record pace. According to the Investment Company Institute (ICI), there are now net outflows of nearly $4 billion from domestic mutual funds for the year. In fact, more than $12 billion has been yanked out during the past two weeks alone! This level of panic is consistent with recent market bottoms.

Remember, we'd already seen three straight years of equity mutual fund outflows before 2011 even started. Four straight years would be unheard of, especially when you consider some of the amazing gains we've seen during this same time frame. The sad truth is, there have been two constants during this bull market: One, higher prices; and two, the retail crowd has missed out on most of the rally. With retail-level investors bailing on stocks once again, do you really expect the rally to stop now?"Billy

Neil Stoloff
06-27-2011, 03:19 AM
I am nonethess fascinated by the mass underperformance of the so-called "smart money" (that is, the money flow that EV tracks). Apparently this smart money is not so smart after all. But how is it dumb? I assume it is dumb because it is large and slow. Moreover, the authors at Zero Hedge argue they are are sheep; John Thomas, "the Mad Hedge Fund Trader" has said the same.

Are our returns and expectations for returns (based, for example, on the performance of the Robot) unrealistic? Or do sharp minded individual speculators inhabit a different universe of some sort, where different laws and expectations can apply?



Nickola,

Professional money managers are not immune to human foibles. Perhaps their training and experience enable them to cope better than most others, but any such advantage is reduced by the career risk they face if they act outside the mainstream (hence the "sheep" label). Two of my favorite quotes on this topic:

“Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”

~ John Maynard Keynes

“Career risk drives the institutional world.”

~ Jeremy Grantham (crediting Keynes)

Mr. Grantham elaborates on the role played by career risk -- to the detriment of client investors -- in Part 2 of his Jan. 2011 quarterly letter. See: http://www.scribd.com/doc/47607952/Jeremy-Grantham-s-January-2011-Letter

Yes, the sharp-minded individual investor who cares only about performance enjoys a distinct advantage.

Cheers,

Neil

nickola.pazderic
06-27-2011, 05:50 AM
And many thanks for the replies.