Debunking Some Myths About Active Management
Sep 26th, 2006 | Filed under: CAPM / Alpha TheoryBy: Barton Waring, Barclays Global Investors & Laurence Siegel, The Ford Foundation
Published: June 2005, Journal of Investing
This is an excellent article that debunks several time-honuored marketing pitches used by active managers - and by extension hedge fund managers. Waring & Siegel say:
“We strongly believe that in the presence of skill active management can be successful. But we also believe it can be sold on its own merits without artificial arguments. So here we debunk some of the myths and stories often told in support of active management. We fear they do more harm than good, and sow confusion, misunderstanding, and ultimately distrust of healthy management disciplines.”
Waring and Siegel argue that many (most) active managers don’t properly understand the extent to which their returns are driven by beta.
“Good managers know the difference between true alpha and market returns. And they know that active management is a zero-sum game…”
While uncorrelated “absolute” returns are often touted as the ultimate in active management, the authors argue that reducing beta exposure can actually be a bad thing if it confounds the client’s policy mix. In other words, there is often method in the madness of a high beta exposure. (Still, there may not be method in the fees charged by active managers for beta exposure that can be purchased separately for close to 0%).
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[…] Laurence Siegel, Director of Research in the Investment Division of the Ford Foundation was co-author of one of the most popular papers we’ve posted here at AllAboutAlpha.com. As an investor, Siegel is able to offer a somewhat more skeptical view of the hullabaloo surrounding portable alpha. […]
[…] Still, there’s no question about it, Barclays is “passive and quantitative”.  After all, BGI controls 60% of the US ETF market. And BGI has published several well-read white papers poking holes in the way active management is sold to investors. But even these articles acknowledge an important role for active management. For example, in this paper BGI’s Barton Waring and The Ford Foundation’s Laurence Siegel say: “We strongly believe that in the presence of skill active management can be successful. But we also believe it can be sold on its own merits without artificial arguments.” […]