Man on Coin Stack

2012: Another Dismal Year for Active Managers and Market Predictors

Man on Coin Stack

"It is absurd to think that the general public can ever make money out of market forecasts."
– Benjamin Graham, Source: The Intelligent Investor



At Index Funds Advisors, we often counsel investors to avoid a “prediction addiction” and to especially avoid listening to the pundits who are hopelessly addicted. The past calendar year of 2012 proved us right once again, at least according to a recent BloombergBusinessweek article. To start with, the average forecast of 12 strategists tracked by Bloomberg was a 7% increase in the S&P 500. It actually increased by 13.4% (excluding dividends). Well, at least they don’t have to be as embarrassed as the Morgan Stanley analyst who predicted it would lose 7%. His mea culpa was based on underestimating the degree to which the Fed and the European Central Bank would intervene to stabilize the markets.

Regarding the performance of active managers in 2012, the data is starting to come in, and the picture is not a pretty one. The Bloomberg Global Aggregate Hedge Fund Index showed a paltry 1.6% gain through November 30th. However, this dismal performance does not seem to have deterred the trustees of the Nobel Prize Endowment who now plan to incorporate hedge funds because, according to Director Lars Heikenstein, “We see that we can get more return with less risk by doing that.”  While we wish him the best in this ill-fated attempt to defy one of the most basic tenets of finance, we suggest that perhaps he should try dropping his mother’s favorite vase off a high building to see if Newton’s law of gravity could be suspended for him as well. Among the better known hedge fund managers is John Paulson who killed it during the 2008 financial crisis, as documented in The Greatest Trade Ever.  He made the unfortunate prediction that European Sovereign bonds would tank in a similar fashion to mortgage-backed collateralized debt obligations. As in 2011 when his fund loss half of its value, his bets on European credit default swaps got his shareholders clobbered to the tune of 17%, as reported on December 5th in Business Insider.  Some of them are probably feeling like the greatest mopes ever. Like so many other fallen angels before him, perhaps he should have quit while he was ahead. Returning to the more mundane world of mutual funds, Bloomberg found that more than 65% of mutual funds benchmarked to the S&P 500 fell short of it, which is par for the course, according to the Standard and Poors Index Versus Active Scorecard. We look forward to seeing this report fully updated for 2012.

William Buiter of Citigroup was among the many pundits who predicted the beginning of the dissolution of the European Union, starting with the exit of Greece. As we now know, these dire events did not unfold, and the MSCI European Index rallied with a healthy gain of 19.1%. While we could easily continue with many other predictions that did not pan out, we think you get the point, and perhaps it’s a little unfair of us to cherry-pick the ill-fated predictions while ignoring the accurate ones. The problem is that there are so many of the former and so few of the latter. If you were suffering from a prediction addiction, we hope you are now cured.