The S&P 500 is having a cracking year.

Change that… it’s had a cracking 9 years and it’s not finished yet.

Take a look at the chart below for 2017 for the world’s largest equity market:

S&P 500 for 2017

It hit a new record high last night.

When we finished 2016… the S&P 500 closed at 2238 points. And if you recall – there were plenty of folks suggesting the “end was nigh”.

7 months later — it’s up another 10.5% (not including dividends).

What’s to say we don’t see another 10% before the year’s out?

Why not?

Earnings are strong and rates will stay low.

Regular readers will know we have not penned one bearish argument for the S&P 500 this year.

Why would we?

The all-important weekly trend is bullish. Only a fool would bet against it. But trust me – there are plenty of fools.

We mentioned a few just yesterday. This week, I caught this story:

Ray Dalio


The world’s largest hedge fund is down for the year?

How can that be?

Conditions could not be any better. This is “shooting fish in a barrel” type stuff!

And yet the former “Masters of the Universe” are not able to make money.

But Ray Dalio is not alone in his struggle to post winning numbers. You see, on average, macro hedge fund managers lost 0.8% for the half-year.

Yes, they too lost client money as the S&P gained almost 11%. Here’s the The Australian Financial Review yesterday:

‘The broader hedge fund industry returned 3.7 per cent in the first half after barely making any money last month, and returned about 4.9 per cent annualised over the past five years.’

That’s a woeful performance from the “2 & 20” crowd.

That is, they will quite often charge you 2% just for managing your money (even if they may lose it); however if they happen to make you a profit – well they will take 20% of that.

What a great gig!

You get paid for losing client money!

If you read mainstream – they will talk to various political and economic uncertainties opposite their underperformance. Or something like that… bla bla bla.

Newsflash: there will always be political and economic uncertainties.

Get used to it. Better still… build a bridge and get over it.

Don’t Focus on what “might” happen…

In my experience, too many investors / traders make the mistake of trading on what “should” be happening.

In fact, we touched on this just yesterday with respect to the Australian Dollar.

I said that it “should” be trading lower… eg more than 10%.

But it’s not.

And whilst I can give you “ten or more” good reasons why the Aussie Dollar should be lower than 70c – that counts for nothing.

The fact is the tape is bullish. That’s all that matters. Price action.

So we respect it and put our (foolish) bearish hypothesis in the bottom drawer where they belong.

Ed Seykota named it “funnymental” analysis… because that’s exactly what it is.

Most of these hedge-fund guys will typically form (strong) views about something and then they expect the market do exactly that.

Worst still – they make foolish forecasts. It’s the wrong mindset.

For example, in the case of the S&P 500 this year – most thought we would see a correction. This was their trading mindset.


As a complete aside, last year I read this article “You are Owed Nothing”

Many may think the market owes you something – or argue it’s wrong if a trade doesn’t work out.

But guess what – it’s never wrong.

You are.

You are either on the right side of the trade or the wrong side.

Hedge funds this year have obviously been on the wrong side (for the most part) based on their performance. We have been on the right side.


Buy a (Bullish) Index… Beat a Fund Manager

For years we have told readers to ditch their “monkey” fund manager.

Why monkey?

Because that’s what Warren Buffett called them in his latest newsletter to shareholders.

He pulled no punches.

For example, he made a million dollar bet nine years ago that the Vanguard Index Fund (eg the S&P 500) will beat active management.

If he wins – he will donate the money to charity.

Guess what – Buffett’s Vanguard index fund is up over 80% – and fund managers have struggled to return 20%.

As the Oracle of Omaha told us – most of them (not all) are useless.

However, you can be sure they will happily charge you fees (eg anywhere between 1% and 2% on your money) for what mostly is sub-par performance.

As an aside, imagine what their average performance will be when markets are actually falling!

We hate to think.

Odds you some of you reading this have money tied up with these suckers somewhere (eg your super).

Now there are number ETFs in Australia (and abroad) which will mirror the performance of a major Index.

For example, in Australia we have the STW – SPDR S&P/ASX 200 Fund

We went long this fund in May of last year (ie when the weekly intermediate trend turn bullish).

Since then we have collected 5 dividend payments (at around 4%) — taking one third of our capital gains off the table at 6000. It was a good move.

Now if you want exposure to the S&P 500 – you could buy something like the SPY SPDR S&P 500 ETF Trust.

Same deal.

The SPY has paid less in dividends but the capital gains are much stronger.

These are what I consider passively active strategies; ie checking in with the weekly trend and raising your stops along the way (protecting capital).

I say “passive” because it’s not much more than 5 minutes work each week.

Both have remained bullish for in excess of 60 weeks… destroying the performance of the hedge-fund industry.

Now at some point these weekly trends will end.

We know that. All trends end.

And when that time comes – we will happily step off until the market once again finds its feet.

Putting it All Together… 

There’s a great line in the “You are Owed Nothing” article:

The stock market doesn’t owe you anything. It doesn’t care that you’re about to retire. It doesn’t care that you’re funding your child’s education. It doesn’t care about your wants and needs or your hopes and dreams

He is right. It doesn’t care.

We accept (and know) this. As such, we have developed a distinct edge when it comes to investing and trading.

Three things which gives us an edge:

First, we apply the basic principles of probabilities (eg trading with longer-term trends) when it comes to placing a trade. We only trade when it’s in our favour. And we are happy not trading if the market is not favourable.

Second, we overlay that with prudent capital management strategies.

For example, we know exactly where we will exit a losing trade before we enter it. And we also know the maximum amount of capital we would ever risk on any one position (eg never risk losing more than 2% of your entire equity on one trade).

If you want a refresher – read my “2 & 20” post.

And last but not least — we never trade on what we think might happen but rather what is happening (ie the price action and its trend).

Apply these three simple strategies and you can stop “feeding the over-fed monkeys”.

… trade the tape

When investing in shares, you can lose you some or all of your money. The potential gains on my blog are based on investing in Australian and US markets and don’t include taxes, brokerage commissions, or other fees. It’s important you seek independent financial advice regarding your particular situation. For any investment, never invest more than you can afford to lose, and keep in mind the ultimate risk is that you can lose whatever you’ve invested. If in doubt – always seek independent financial advice.

2 thoughts on “Fund Manager Performance Sucks (Again)”

  1. You have made a true believer of me Adrian. You can have a sound “premise” if you like, but if the tape doesn’t confirm it – don’t buy it!!

    Trade the tape over your “premise” – be it funnymental or macro – but without the chart??…..should have gone to spec savers

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