Hedge funds have been trounced by low-cost index funds since the global financial crisis. But some commentators say we've entered a new era and hedge funds may now be worth another look.
In some respects, they may well be right on the first point. But are they right on the second? In his latest article for Sparrows Capital, ROBIN POWELL takes a closer look.
"The four most dangerous words in investing,” the famous investor Sir John Templeton once said, “are 'this time it's different’.”
Again and again, investors who have assumed that things different at any one point in time, and changed their strategy accordingly, have paid the price.
The obvious example is active investing. There’ve been constant assertions over the years that active was about to make a comeback; but investors who heeded the advice of Charley Ellis, Burton Malkiel and others in the 1970s, invested in equity index funds, and stuck with it, have outperformed the vast majority of active investors. Those who tilted their portfolios towards the risk premia identified by the likes of Fama and French — principally size, value, quality, profitability, momentum and low-volatility — have done even better over the long term.
I’m a staunch advocate of disciplined, low-cost, systematic investing. But, to play devil’s advocate for a moment, what if the situation we find ourselves in today really different? What if systematic factor investing is no longer optimal in the investing environment we face today? And if that is the case, should investors now be looking, as many are suggesting, to alternative asset classes such as hedge funds?
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