Annuities … The Good, the Bad and the Ugly

Too often, I’ve heard this all-too-familiar story. A client brings in an annuity policy to review, either for themselves or a family member. They bought it to create a steady annual flow of income on later life, as insurance against unexpected longevity.

But what we see is a jaw-dropping set of numbers that reveal poor performance, high commissions paid to brokers, misleading benefits and ridiculously high expenses. Unfortunately, too many investors purchase an expensive annuity that doesn’t fit their needs.

How do so many fall into this trap? There are a few key reasons.

Great for the Seller: Commissions

As an investor, the first thing to be wary of is the possibility that a broker, or agent, is pointing you in the direction of a product that’s in their interests more than yours. Exhibit A is the annuity. An insurance product rather than a securities package, annuities are sold by insurance agents rather than brokers. It is sometimes the best option an insurance-only agent (not securities licensed) can offer.

There is nothing wrong with selling annuities, nor is there anything wrong with insurance agents earning commissions. However, when a product has particularly high commissions, it is all the more important to ask the agent directly whether annuities are in your best interests.

Strictly speaking, agents don’t have to act in your best interests because they are not subject to federal fiduciary rules that govern financial advisors. They also pay out among the highest commissions in the financial service industry. The highest rates are paid for longer surrender periods, years during which policy holders are charged for withdrawals above the approved limit.

With so many common options that benefit the seller at the expense of the buyer, it can be tempting for unscrupulous agents to speak to the benefits of annuities while omitting the risks.

Stability for the Buyer

The main benefit of the annuity is the option to guarantee a minimum return. Investors tend to fixate on the apparent risk-free nature of annuities as they plan to enjoy fixed payments after a pre-arranged waiting period.

In reality, this describes just one type of annuity, a fixed annuity. Similar to a Certificate of Deposit (CD), investors sacrifice the potential for a higher rate of return for the guarantee of a smaller one. Unlike a CD, there are generally complex fees and conditions attached to fixed annuities that reduce the value of the annuity.

For example, while tax is deferred as your annuity is accumulating, once you begin to withdraw accumulated funds you’ll have to pay taxes at your ordinary tax rate rather than the lower, applicable, long-term capital gains tax rate. (If you invested $100,000, your annuity grows to $150,000 and you’re in the 35 percent tax bracket. You’ll pay 35 percent on the first $50,000 you take out, 20 percent more than on capital gains at 15 percent.)

More Complex Options May Increase Return

Other types include indexed annuities and variable annuities. These appear to offer the potential for higher returns: indexed annuities because the rate of return is tied to a specific market benchmark, such as the performance of the S&P 500; variable annuities because they allow premium payments to be reinvested, somewhat like a mutual fund.

Unfortunately, these types of annuities often have performance caps to offset the risk the firm takes on by guaranteeing a performance floor. These can significantly reduce expected returns. Participation rate is another factor that limits what investors earn, as it governs what share of returns go to the firm and what share goes to the annuity holder. (For example, a 70 percent participation rate means if the market gains 10 percent, your gain is 7 percent while the firm keeps 3 percent.)

The above limitations on rate of return don’t take into account the additional premium investors must pay for riders to secure some of the benefits of these annuities, which further reduce actual return on investment.

Bottom Line: Insurance, Not Investment

Annuity performance often pales in comparison with a balanced portfolio of stocks and bonds, yet we routinely hear of “new and improved” annuities that insurance agents counsel clients to convert into, via a 1035 tax-free rollover. That only serves to fatten the agent’s wallet while further locking up a client’s ability to earn real income.

The good news is investors are starting to wise up to this. Annuity sales saw a 17% drop between Q4 2015 and Q4 2016. (It is still a $51 billion industry. So, investor beware.)

Does all this mean that you should definitely not purchase an annuity? No. What is important to understand is that while an annuity can act as a hedge against running out of income as you live longer, it is not the same as an investment portfolio geared toward the best possible return at the lowest possible expense.

Be cautious, and always speak with an advisor bound by a fiduciary obligation to act in your best interests before you purchase any kind of annuity.

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2017, The BAM ALLIANCE

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Understanding Different Types of Risks

Harry Markowitz received the Nobel Prize in Economic Sciences in 1990 for his contributions to the body of work known as “modern portfolio theory.” Probably his greatest contribution was to turn the focus away from analyzing the risk and expected return of individual investments to considering how its addition impacts the risk and expected return of the overall portfolio.

Markowitz showed it was possible to add risky assets (with low or negative correlation) to a portfolio, increasing the expected return without increasing overall risk. He also demonstrated the importance of diversification of risk.

Today most investment advice focuses on the development of portfolios that are on the “efficient frontier.” A portfolio that is on the efficient frontier is one in which no added diversification can lower the portfolio’s risk for a given return expectation (alternately, no additional expected return can be gained without increasing the risk of the portfolio).

Working with the efficient frontier, investment advisors tailor portfolios to the individual investor’s unique situation. Unfortunately, far too many investors and/or their advisors only focus on the risks of the investments themselves.

Managing Financial, Not Just Investment, Risks

When developing an overall financial plan, there are risks—other than investment risks—that are important to consider. Not integrating the management of these risks into an overall financial plan can cause even the most carefully considered and well-thought-out investment plans to fail. Among the other risks that should be considered are human capital (wage-earning) risk, mortality risk and longevity risk. Let’s consider how these risks should be integrated into an overall financial plan.

Human Capital Risk

We can define human capital as the present value of future income derived from labor. It’s an asset that doesn’t appear on any balance sheet. It’s also an asset that is not tradable like a stock or a bond. Thus, it’s often ignored, at potentially great risk to the individual’s financial goals. How should human capital impact investment decisions?

The first point to consider is that, when we are young, human capital is at its highest point. It’s also often the largest asset young individuals have. As we age and accumulate financial assets, and our time remaining in the labor force decreases, the amount of human capital relative to financial assets shrinks. This shift over time should be considered in terms of the asset allocation decision.

The second point is that we need to not only consider the magnitude of our human capital but also its volatility. Some people (such as tenured professors, doctors and government employees) have stable jobs, and thus their labor income is almost like an inflation-indexed annuity. In other words, it acts very much like a bond. Other people (such as commissioned salespeople and construction workers) have labor income that is more volatile, and thus acts more like equities. Financial advice should incorporate these differences.

For example, for people with safer labor income, it might be appropriate to invest more aggressively—with a higher allocation to equities overall and perhaps higher allocations to riskier small and value stocks. Those with riskier labor income should consider holding less aggressive portfolios (those with higher bond allocations).

This gets to the heart of Markowitz’s work on portfolio theory: An asset shouldn’t be considered in isolation. Note there may be times when the riskiness of one’s human capital changes (after a career change, for example). If the riskiness of the human capital increases, one should consider reducing the riskiness of the other assets in the portfolio, and vice versa.

A related issue is the significance of human capital as a percentage of total assets. If human capital is a small percentage of the total portfolio (because there are large financial assets), the volatility of the human capital and its correlation to financial assets becomes less of an issue.

Correlation, Health And Mortality

The third point we need to consider involves one of the most basic principles of investing—don’t put too many eggs in one basket. Individuals should avoid investing in assets that have a high correlation with their human capital. Unfortunately, far too many people follow Peter Lynch’s advice to “buy what you know.” The result is that they invest heavily in the stocks of their employers.

This is a mistake on two fronts. The first is that it’s a highly undiversified investment. The second is that the investment is likely to have a high correlation with the person’s human capital. Employees of such companies as Enron and WorldCom found out how costly a mistake that can be.

The fourth point to consider is that human capital can be lost due to two risks that need to be addressed by means other than through investments. The first is the risk of disability. This risk can be addressed by the purchase of disability insurance. Thus, the risk of disability and how to address it should be part of the overall financial plan. The other risk is that of mortality. That issue can be addressed by the purchase of life insurance (we will discuss that in more detail).

There are still other points to consider. All else being equal, people with a high earning capability have a greater ability to take more financial risk because they can more easily recover from losses. However, they also have a lower need to take risk. All else being equal, the higher their earnings, the lower the rate of return they need from their investment portfolio to achieve their financial goals—they can choose less risky investments and still achieve them.

Risk Tolerance And Adaptability

Another factor is investors’ willingness to take risk—their risk tolerance. It’s important that investors don’t take more financial risk than their stomachs can handle. The reason is that, when the inevitable bear markets arrive, they might be more inclined to panic-sell, and the best laid plans would end up in the trash heap of emotions.

Even if they were not driven to panic, life is just too short not to enjoy it. One should be able to “sleep well” with his or her investments. Thus, a high earnings capability, or even a high need to take risk, shouldn’t necessarily result in an aggressive investment portfolio.

Yet another factor to consider is the ability to adjust your “supply” of human capital. Consider the following: You develop a financial plan that allows you to retire at age 65. However, the market’s rate of return falls below the expected return you built into your plan, or you weren’t able to save as much as you had expected. Now you will need to work longer.

Can you continue in the labor force? What level of income can you generate? Will the market allow you to sell your skills, and at what price? Younger workers typically have more ability to adjust their supply of human capital. In addition, those with a variety of skill sets also have a greater ability to adjust their supply to economic conditions.

We’ll revisit this discussion later in the week to consider additional risk factors, including mortality and longevity risk, and using “tax alpha” strategies to improve the odds of achieving your financial goals.

This commentary originally appeared April 12 on ETF.com

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2017, The BAM ALLIANCE

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Following Up On 2017’s ‘Sure Things’

At the start of each year, I put together a list of predictions gurus make for the upcoming year—sort of a consensus of “sure things.” We keep track of the sure things with a review at the end of each quarter.

With March behind us, it’s time for our first review. As is our practice, we give a positive score for a forecast that came true, a negative score for one that was wrong and a zero for one that was basically a tie.

The Predictions

Here, then, are the first-quarter results. Each sure thing is followed by what actually happened, and the score.

1. The Federal Reserve will continue to raise interest rates in 2017. That leads many to recommend that investors limit their bond holdings to the shortest maturities. Economist Jeremy Siegel even warned that bonds are “dangerous.” On March 15, 2017, the Federal Reserve did raise interest rates by 0.25%. However, despite the prediction of rising rates actually occurring, through March 31, 2017, the Vanguard Long-Term Bond ETF (BLV) returned 1.78%, outperforming its Short-Term Bond ETF (BSV), which returned 0.56%; and its Intermediate-Term Bond ETF (BIV), which returned 1.26%. Score -1.

2. Given the large amount of fiscal and monetary stimulus we have experienced and the anticipation of a large infrastructure spending program, the inflation rate will rise significantly. On March 15, 2017, the Bureau of Labor Statistics reported that the Consumer Price Index for All Urban Consumers increased 0.1% in February on a seasonally adjusted basis. It also reported that the index for all items less food and energy rose 2.2% over the last 12 months; this was the 15th-straight month the 12-month change remained in the range of 2.1-2.3%. The February increase was the smallest one-month rise in the seasonally adjusted all-items index since July 2016. However, in January, the index rose 0.6%, and the all-items index rose 2.7% for the 12 months ending February; the 12-month increase has been trending upward since a July 2016 trough of 0.8%. We’ll call this one a draw. Score 0.

3. With the aforementioned stimulus, anticipated tax cuts and a reduction in regulatory burdens, the growth rate of real GNP will accelerate, reaching 2.2% this year. We’ll have to wait to get the first quarter figures to make a call on this one. Score 0.

4. Our fourth sure thing follows from the first two. With the Fed tightening monetary policy and our economy improving—and with the economies of European and other developed nations still struggling to generate growth and their central banks still pursuing very easy monetary policies—the dollar will strengthen. The U.S. Dollar Index (DXY) ended 2016 at 102.38. The index closed the first quarter at 100.35. Score -1.

5. With concern mounting over the potential for trade wars, emerging markets should be avoided. Despite those mounting concerns, through March 31, 2017, the Vanguard FTSE Emerging Markets ETF (VWO) returned 10.87%, outperforming the S&P 500 Index, which returned 6.07%. Score -1.

6. With the Shiller cyclically adjusted price-to-earnings ratio at 27.7 as we entered the year (66% above its long-term average), domestic stocks are overvalued. Compounding the issue with valuations is that rising interest rates make bonds more competitive with stocks. Thus, U.S. stocks are likely to have mediocre returns in 2017. A group of 15 Wall Street strategists expect the S&P 500, on average, to close the year at 2,356. That’s good for a total return of about 7%. As noted above, the S&P 500 Index returned 6.07% in the first quarter. Score -1.

7. Given their relative valuations, U.S. small-cap stocks will underperform U.S. large-cap stocks this year. Morningstar data shows that at the end of 2016, the prospective price-to-earnings (P/E) ratio of the Vanguard Small-Cap ETF (VB) stood at 21.4, while the P/E ratio of the Vanguard S&P 500 Index ETF (VOO) stood at 19.4. Through March 31, 2017, VB returned 3.74%, underperforming VOO, which returned 6.05%. Score +1.

8. With non-U.S. developed and emerging market economies generally growing at a slower pace than the U.S. economy (and with many emerging markets hurt by weak commodity prices, slower growth in China’s economy, the Federal Reserve tightening monetary policy and a rising dollar), international developed-market stocks will underperform U.S. stocks this year. Through March 31, 2017, the Vanguard FTSE Developed Markets ETF (VEA) returned 7.81%, outperforming VOO, which returned 6.05%. Score -1.

Analysis Of Results

Our final tally shows that five sure things failed to occur, while just one sure thing actually happened. We also had one draw and one too early to call. We’ll report again at the end of the second quarter.

The table shows the historical record since I began this series in 2010:

Only about 25% of sure things actually occurred. Keep these results in mind the next time you hear a guru’s forecast.

This commentary originally appeared April 10 on ETF.com

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2017, The BAM ALLIANCE

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The Antidote To Stock Market Hysteria

Just for fun, Google the words “market pullback.” There are over 2.2 million results–most of them market predictions–and the first page of results is dominated by calls for an imminent market reversal that the simple desk calendar has already proven false.

However, despite their worthlessness, market predictions remain as predictable as market opens and closes. (And I predict no end in sight.)

But why?

First, there’s a clear profit motive. Apparent urgency leads to activity, and activity is still how most of the financial services industry makes its money.

“Bullish predictions encourage investors to pour fresh money into the markets, helping asset management companies to enjoy rising profits,” the New York Times reported, noting that the Wall Street forecaster’s consensus since 2000 has averaged a 9.5% increase each year. They accidentally got it (almost) right in 2016, but in 2008, the consensus prognostication missed the mark by 49 percentage points (an outcome that makes your local weatherman seem like a harbinger of accuracy)!

But not everyone’s positive either. My colleague and the co-author of the new book “Your Complete Guide To Factor-Based Investing,” Larry Swedroe, analyzed Marc Faber’s perpetually cataclysmic proclamations and rendered the good doctor “without a clue.”

But perhaps more surprising, despite the persistent inadequacy of market forecasts, there’s apparently a demand for such soothsaying. Market forecasters capitalize on our unquenchable desire to know the unknowable. “This irrational behavior is caused by an all-too-human need to believe that there is someone who can protect us from bad things happening,” says Swedroe.

Further, “Many individuals believe they are above average in their knowledge, overall judgments, and expertise about all types of money matters,” says Victor Ricciardi, Finance Professor at Goucher College and co-editor of the book Investor Behavior: The Psychology of Financial Planning and Investing.”

The result is that, however un-newsworthy, even venerable publications still print the crap.

What solace can I offer?

On a cosmic continuum, there absolutely is an “imminent” market collapse coming. You can’t predict it, but you can (and should) expect it. And compared even to the relative microcosm of market history, another raging bull market is likely to follow close on its heels.

The rational choice in optimal portfolio structuring, therefore, is to create a portfolio that isn’t designed solely to capitalize on the next market meltdown or spike–but to accommodate both scenarios and everything in between, with balance.

The antidote, therefore, for market hysteria is informed apathy.

Instead of acting on–or even fretting over–a single market prognostication, acknowledge that no one has demonstrated an ability to predict accurately. You’ll be in good company. Warren Buffett, in his recent letter to shareholders, gave this counsel: “[T]he years ahead will occasionally deliver major market declines–even panics–that will affect virtually all stocks. No one can tell you when these traumas will occur.”

And what does he say about those who attempt to predict? “[H]eaven help them if they act on the nonsense they peddle.”

Please recognize this proactive apathy means you likely won’t have sufficient fodder for the watercooler or cocktail party when others are regaling the group with their isolated investment wins and self-loathing losses. But that’s OK, because portfolio volatility isn’t supposed to be the most interesting thing in your life. Your portfolio is better served to simply support the most interesting things in life.

This commentary originally appeared March 18 on Forbes.com

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2017, The BAM ALLIANCE

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Turns Out the “Smart Money” Isn’t

Institutional investors are generally considered “smart money” that exploits the behavioral biases of “dumb” retail money. However, there have been some holes poked in that idea recently.

For instance, Roger Edelen, Ozgur Ince and Gregory Kadlec, authors of the study “Institutional Investors and Stock Return Anomalies,” which was published in the March 2016 issue of the Journal of Financial Economics, write that while prior research had found a positive relationship between smart money and return anomalies at shorter time horizons (three to 12 months), it turns negative for longer horizons.

Study Findings

They found: “Not only do institutional investors fail to tilt their portfolios to take advantage of anomalies, they trade contrary to anomaly prescriptions. Most notably, they have a strong propensity to buy stocks classified as ‘overvalued’ (i.e., the short leg of anomaly portfolios). For example, during the anomaly portfolio formation window (prior to anomaly returns) there is a net increase in both the number of institutional investors and fraction of shares held by institutional investors in short-leg stocks for all seven of the anomalies we consider. In four of the seven anomalies there is significantly greater institutional buying in short-leg stocks than in long-leg stocks. There is significantly greater buying in long-leg stocks in only one case.”

This surprising finding was in sharp contrast to prior research on performance, with the difference being the horizon period studied. They confirmed this horizon effect, finding a significant positive relation between quarterly changes in institutional holdings and next-quarter returns that turns significantly negative as the time horizon extends to a year or longer. Thus, the authors concluded that “while institutional trades seem to be informed when evaluated over short horizons, that assessment seems premature when evaluated over a longer horizon.”

These findings suggest that institutional investors actually fail to exploit well-known anomalies. Instead, they contribute to their persistence. Thus, the short-term outperformance may not be the result of a “smart money” effect, but instead a result of the price pressure associated with persistent institutional trading, as opposed to informed trading.

This hypothesis is consistent with the findings of George Jiang and H. Zafer Yuksel, authors of the study “What Drives the ‘Smart-Money’ Effect? Evidence from Investors’ Money Flow to Mutual Fund Classes,” which was published in the January 2017 issue of the Journal of Empirical Finance.

By studying mutual fund flows for retail (unsophisticated) and institutional (sophisticated) investors, they found that short-term persistence in performance is not due to the so-called smart money effect, but was instead caused by persistent flow. And the persistence of short-term performance then experiences a long-term reversal. In other words, institutional investors (at least institutional mutual funds) are also noise traders who can contribute to mispricings.

Who Exploits Anomalies?

Because someone owns the long leg of the anomalies, it begs the question: Who is exploiting these well-known anomalies? Mustafa Onur Caglayan and Umut Celiker provide the likely answer through their January 2017 study, “Hedge Fund vs. Non-Hedge Fund Institutional Ownership and the Book-to-Market Effect,” which covers the period July 1982 to June 2014.

The book-to-market (or value) effect is a good choice to study, as it’s well-known, and there are both risk-based and behavioral-based explanations for it in the literature. While naive investors’ overreaction could contribute to the book-to-market effect even if it’s partly explained by a risk premium, sophisticated investors—namely, institutions—should exploit this return predictability, take advantage of the anomaly and therefore mitigate the extent of overreaction. However, we saw previously that, at least in the case of mutual funds, institutions are contributing to any price overreaction, not correcting it.

Caglayan and Celiker tested whether there is a difference between hedge funds and nonhedge-fund institutional investors in terms of their ability to adjust their positions in order to take advantage of the book-to-market effect, and whether hedge funds’ decisions to invest or disinvest in a particular stock predicts future stock returns in the context of the book-to-market anomaly.

The authors focused on hedge funds and non-hedge funds’ change in stock ownership in the most recent quarter prior to the return measurement window of anomaly returns. They found evidence of a statistically significant and drastic change in hedge funds’ behavior as they adjust their preferences from growth to value stocks immediately after the book-to-market values of equities become public knowledge.

Hedge Funds Act On Information

In addition, they show that hedge funds detect overpriced growth securities and trade them to their advantage, especially when non-hedge funds move aggressively in the opposite direction. This is consistent with the idea that hedge funds are the informed investors. On the other hand, they found that non-hedge fund institutional investors do not alter their positions significantly when the information becomes public knowledge.

Specifically, the authors write: “Overvalued (growth) stocks heavily bought by non-hedge funds and simultaneously sold by hedge funds in the most recent quarter underperform significantly in the next year, generating an eye-opening three-factor alpha of -1.33% per month with a t-statistic of -5.54 and a four-factor alpha of -1.23% per month with a t-statistic of -5.21…. On the other hand, we do not find any significant negative subsequent abnormal returns for stocks sold by non-hedge funds and heavily bought by hedge funds.”

They concluded that their findings “support the notion that hedge funds detect negative information on stocks and trade them to their advantage by unloading them especially when non-hedge funds move aggressively in the opposite direction.”

They added: “It is also noteworthy to indicate that the underperformance of growth stocks heavily bought by non-hedge funds and contemporaneously sold by hedge funds lasts in all four quarters analyzed. In other words, the underperformance of these stocks in the subsequent year is not due to an underperformance in one or two quarters, but is due to underperformance in each of the four quarters, showing that our results exist in each quarter during the return measurement window of anomaly returns, and hence the impact of price pressure is completely ruled out.”

Finally, they also noted that their results held not only for the full period, but for both subperiods they studied as well.

It’s important to observe that the evidence showed a stronger ability for hedge funds to detect overpriced securities compared with underpriced securities. This aligns with the theory of limits to arbitrage and short-sale constraints, which allow mispricings to persist even after publication.

The Limits Of Arbitrage

As the authors note: “It is well known that the arbitrage of underpriced securities requires only the purchase of such stocks, while the arbitrage of overpriced securities requires the short-sale, which is much more costly for investors. Therefore, the disappearance of underpriced stocks takes much less time compared to the disappearance of overpriced securities.”

The issue of how limits to arbitrage allow anomalies to persist is discussed in detail in “Your Complete Guide to Factor-Based Investing,” my latest book, which I co-authored with Andrew Berkin.

While the evidence shows that hedge fund managers are skilled, unfortunately the historical evidence also demonstrates that they keep any “economic rent” (as you should expect, because the ability to generate alpha is the scarce resource) that results from their skill. An indication of this can be found in the fact that investors in hedge funds have not been well rewarded.

For example, for the 10-year period ending in 2016, the HFRX Global Hedge Fund Index lost 0.6%, underperforming every major equity and bond asset class. The underperformance ranged from 0.4 percentage points when compared to the MSCI EAFE Value Index to as much as 8.8 percentage points when compared to U.S small-cap stocks.

Thus, if you want to capture the premiums provided by anomalies (such as the book-to-market effect), you should invest in low-cost, passively managed funds that seek to capture the returns available in a systematic way.

This commentary originally appeared February 10 on ETF.com

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2017, The BAM ALLIANCE

The BAM Alliance

Posted by:

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