I Just Don’t Get It (the Failure of Mutual Funds to Think Outside the Box)
As a developer whose programs have consistently outperformed the market by a healthy margin (real-time and independently-audited), it’s difficult for me to comprehend the current state of traditional investing where beating the market by an extra 1-2% per year constitutes outperformance.
But it really doesn’t matter because at this moment, that is the way it is. So what really pains and befuddles me is why the mutual fund industry, with such a low hurdle to clear, doesn’t reach out to folks like me to apply some of our concepts to their more fundamental approach to investing; in other words, why they don’t think outside their little box.
Now the way I trade could never be applied as-is to a mutual fund (hedge fund yes, mutual fund no), but that’s not what I’m proposing.
I’m proposing that those concepts only be applied to transactions that would already be taking place with or without a quantitative component: managing fund inflows (new money), expected outflows (redemptions), and position changes within the portfolio. Delay a purchase/sale here by a day or so, scale into a position there, etc.
Can anyone honestly tell me that a developer who has produced as much positive consistent alpha as we have couldn’t apply those concepts to a mutual fund and produce that magical and much sought after 1-2% annual outperformance? I think not.
What would it take to pull it off?
Simple. Lock me (and/or a handful of other quantitative minds who have proven their ability to outperform) in a room for a month, with food and water slipped under the door thrice a day. I used to think I didn’t come cheap, but compared to some of the Wall Street bonuses splashed across the financial press, I work for third world wages. Hello Morningstar 5-star rating.
I just don’t get it.
P.S. I’ll respond in advance to what would have probably been the first comment to this post, “but Michael, Wall Street already uses these quant-gurus, and yet they still underperform”. To that good sir I call bullshit. Yes, Wall Street employs quants. No, they haven’t done a good job as it relates to mutual funds (as evidenced by their subpar performance). Why? I haven’t the foggiest clue. Perhaps it has to do with dropping their creativity off at the door when they entered the halls of Academia.
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