>how hard it is to be a good active investor, basically exactly what Warren Buffet thinks
In broad brush strokes, yes. However this blog post uses a different math scenario.
- Warren Buffett's premise for winning the bet was the hedge funds' 2% "management fee" and 20% carry. Therefore, any attempt to beat Warren's passive investing starts with a handicap of minus-2% and has to have bigger positive returns that overcome it.
- This essay is about long-term "God clairvoyance" of _eventually_ being correct is negated by short-term negative returns which make people "fire" God. E.g. the investor might have a 2-year lockup of his funds before he can redeem them. E.g. After 2 years, the investor sees that the hedge fund is losing money -- but doesn't realize that it's a temporary dip. Therefore, he redeems his money (aka "fires God") and never got see that God was ultimately correct.
(Or put another way, if the lockup period and the fund's entire lifetime were exactly the same, the blog post couldn't be written.)
I've seen (and implemented in code) some pretty brutal liquidity algorithms. I've no doubt God could use such algorithms to always ensure positive performance on those dates on which liquidation is possible.
Funds might be locked up for two years, and afterwards only redeemable on the first day of the fiscal quarter. On the first liquidation event, only 25% of the funds are redeemable. If you submit notice on the first day of the next fiscal quarter, 33% is redeemable, followed by 50% and 100%. If you miss a quarter, the sequence starts over.
I think this article is attempting to make a different point.
It essentially argues (unconvincingly IMHO) that it is difficult to _distinguish_ a (very contrived type of) "perfect" active investor from a "bad" investor whereas Buffet argues that it is difficult to _be_ a good active investor.
These are not necessarily inconsistent but they do have opposite impacts on investment decisions.
To my mind this is dishonest marketing "research" whereas Buffet is making an important point.
Oh absolutely, I thought that type of active investor was so contrived that this was just an article written more or less for entertainment (to point out how hard it is to be an active investor).
Indeed. Reading my own words, I sound rather more worked up than I am :)
I do think this article is a bit sneaky dressing itself up as entertainment since it is published by a business that profits from people deciding to invest.
It does provide a means to illustrate the agency problem though.
If I had perfect knowledge of the future and had to buy and hold a given set of positions for myself for some fixed period, I would simply choose those that maximised my return at the end. HOWEVER if instead I had to invest on behalf of others (in return for some fee) and was subject to being fired, I would be tempted to choose a different (thus suboptimal) set of positions such as those with smallest drawdown / maximised minimum rolling quarterly Sharpe / ...
His underlying point is broadly right - "past performance is no guarantee of future success" and as such historical (which includes current at the time of making an investment decision) is a fairly poor predictor.
The argument that the fund research sellers peddle is that "we recommend based on the investment methodology in use, the processes, risk management, the people, etc etc". Otherwise what would they be doing that a simple google search couldn't?
Again, arguably far better metrics to find an active fund that will on average out-perform. They're not wrong.
Warran Buffet's opinion isn't relevant here. This is presented as a study providing empirical evidence in support of it's conclusions and as such needs to stand on it's own merit.
