Wednesday, February 25, 2009

Strategies - The Index Funds Win Again -

Strategies - The Index Funds Win Again -
"Kritzman... set up his study to accurately measure the long-term impact of all the expenses involved in investing in a mutual fund or hedge fund. Those include transaction costs, taxes and management and performance fees....Then he calculated the average return over a hypothetical 20-year period, net of all expenses, of three hypothetical investments: a stock index fund with an annualized return of 10 percent, an actively managed mutual fund with an annualized return of 13.5 percent and a hedge fund with an annualized return of 19 percent. The volatility of the three funds’ returns — along with their turnover rates, transaction fees and management and performance fees — was based on what he determined to be industry averages.

Mr. Kritzman found that, net of all expenses, including federal and state taxes for a New York State resident in the highest tax brackets, the winner was the index fund....Expenses were the culprit. For both the actively managed fund and the hedge fund, those expenses more than ate up the large amounts — 3.5 and 9 percentage points a year, respectively — by which they beat the index fund before expenses.."


Anonymous said...

Twenty years? Tell that to someone in their late fifties who had much of their retirement funds in index funds the last year. They'll be eighty before they reconver?

Twenty years is far too long for a human scaled span. It bumps up against the Keynsian limit: In the long run we are all dead.

The Mike said...

Wow. Talk about heroic assumptions: 350bp and 900bp gross excess returns for active mutual funds and hedge funds (respectively).

On the hedge fund side, this also assumes you do proper due diligence and don't step into the next Bayou Capital / Madoff ...

As for the previous commenter -- someone in their late-50s should never have been more than 60% in stocks to begin with. That was a poor asset allocation decision from the get-go.