The End of (asset management) History?
| Mar 12th, 2008 | Filed under: CAPM / Alpha Theory, Investment Management Fees | By: Alpha Male |
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In his famous 1989 essay “The End of History?” (and subsequent book), author Francis Fukuyama argued that the the age-old battle between liberal democracy and other (more totalitarian) forms of government was quickly coming to an end. Since such battles had been the hallmark of human history, history itself was therefore coming to an “end”.
To a great extent the history of investment management (at least, since Markowitz) can be described as similarly bipolar struggle - this one between active and passive management. Efficient market theorists would argue that the final pitched battles between the two sides are being fought in the mutual fund and ETF industries – with ETF’s destined to triumph. However, proponents of active management point to the hedge fund industry as proof that active management is not only alive and well, but is consolidating its forces. Are either of these the final epic battles in the history of asset management?
A couple of news items yesterday suggest the balance of power is tilting toward the efficient market theorists. First, Mark Hulbert writes about Kenneth French’s latest paper, “The Cost of Active Management” in the New York Times. As far as we can see, the paper has not yet been released to the public. So Hulbert’s interpretation is all we have to go on for now.
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It might be an interesting situation if everyone holds the “market” by investing in an ETF. The efficient capital flows, going to “better” firms, incentives for companies to perform etc. would disappear. Or am I missing something and thus horribly wrong.
[...] “At the end of the day, most academics seem to now believe that markets are pretty efficient, but not perfectly efficient.” (All About Alpha) [...]
Frankly, the $100 billion seemed a bit low. The $1.5 trillion (est market cap) Financial Service industry has other income besides the tips it collects as Maître d’ to the capital markets, but Wall Street DOES have expensive habits to support.
I also wonder about this fixation on scoring who beats the market versus who doesn’t. If there were a perfectly efficient market, and half the investors made low-risk, low-return investors, they should be just as happy as the high-risk, high-return crowd. Except you’d have all these white-shoe types telling you that you could earn more, never mention the risk, and the little two-and-twenty intermediation they would be performing for you.