With indexing on one side and hedge funds on the other, proponents of the opposing investment strategies seemed to agree more than disagree at a Feb. 12 Fordham roundtable.
The conversation played out at the New York Athletic Club as the Fordham Wall Street Council teamed up with the New York Hedge Fund Roundtable for “A Random Walk Down Wall Street: Searching for the Alpha 40 Years Later.” The Graduate School of Business Administration (GBA) sponsored the event which was organized by several GBA alumni and Sris Chatterjee, Ph.D., associate dean of GBA. Kevin R. Mirabile, a member of the Fordham business faculty, moderated.
The talk derived its title from the 1973 book by indexing proponent Burton Malkiel, Ph.D., the Princeton University economist, and Malkiel was on hand to argue his point of view. Indexing, he said, is an efficient strategy, even in countries where financial markets are not particularly efficient.
In 1973 Malkiel said he suggested that a blindfolded chimpanzee could throw darts at the stock pages of the Wall Street Journal and select a portfolio that did as well as the experts’ portfolio picks.
While he admitted that the anecdote was extreme, he nevertheless used it shake up a Wall Street community that, at the time, didn’t allow for index funds. (Three years later the Vanguard Group started the first index fund.)
Malkiel acknowledged, however, that there were plenty of firms with active investment in hedge funds that had great long-term records.
“If I knew back in 1973 that Warren Buffet was going to be Warren Buffet, I would’ve said ‘Buy Berkshire Hathaway, don’t buy a simple index fund,'” said Malkiel.
While there will surely be Warren Buffet over the next 40 years, exactly who that might be is anyone’s guess, he said, adding “you can count on the fingers of one hand the number of active managers who actually beat the index 2 percentage points or more.”
“The one thing I’m absolutely 100 percent sure of: the lower the cost that I pay to the purveyor of my investment service, the more there’s going to be for me,” he said.
Scott MacDonald, Ph.D., head of research at MC Asset Management Holdings, LLC. and a purveyor of hedge funds, acknowledged that hedge funds do have larger performance fees. But their more nimble nature allowed them to take advantage of the better instruments and thus produce more profit.
MacDonald cited several areas of interest for managers that are abetted by a more active role, including emerging markets, frontier markets, and infrastructure needs, which he noted exist worldwide. The United States alone is projected to spend $57 trillion trough 2030 on infrastructure, and the market also exists in China and Russia, he said.
Both men agreed that investment in global funds, whether through index or hedge funds, will play a bigger role, particularly in those developed nations where aging populations are leading to depleting social welfare systems, while a waning younger population is supporting those systems less and less.
“Even China with its one child policy, has a higher youth population per capita than Catholic Spain and Catholic Italy,” said Malkiel.
The two men also shared a concern that bonds are not a very good investment while our nation’s politicians remain intractably mired in indecision. (Both issues, health care and political morass, were concerns for experts at Fordham’s Economic Round Table held two weeks ago.) They also agreed that if a hedge fund is to be a success must stay ahead of the curve to stay relevant—unlike the Dot.Com debacle some years back.
Plenty of hedge funds “have no real edge,” said MacDonald, but they are still better suited then mutual funds to take advantage of change, provided they have the ability to change as well.
“Like a good comedian, you can’t keep using the same material,” he said.
In concluding, Malkiel admitted that even he doesn’t index everything in his portfolio.
“Telling someone they can’t beat the market is like telling a 6 year-old that Santa Claus doesn’t exist,” he said. “You know, investing is fun–I even try it myself.”
The Fordham Wall Street Council was formed in 2010 by the Graduate School of Business Administration to foster collaboration among GBA students, faculty, staff, alumni and friends interested in the various sectors of the capital markets.