My first Curious Capitalist column, “Hedge Funds Head for Mediocrity,” is in the edition of Time that hits newsstands tomorrow. It’s also online right now, but I must say it looks much prettier on paper (worth every one of those 495 pennies). Here’s how it starts:
In 1962, a government study of mutual funds revealed that they were, on average, average, or worse. This was an affront to many on Wall Street who assumed that, of course, professional investors beat the market. It was left to legendary investor Benjamin Graham to explain in a speech to securities analysts that “neither the financial analysts as a whole nor the investment funds as a whole can expect to ‘beat the market,’ because in a significant sense they (or you) are the market.” Read more
The 1962 government study, in case you want to look it up at your local federal depository library, was A Study of Mutual Funds, Prepared for the Securities and Exchange Commission by the Wharton School of Finance and Commerce. The main author was Irwin Friend. The rest of the column is about how hedge funds are nearing the point that mutual funds did in the 1960s, where they can longer beat the market because they are the market. There are several references to the great hedge fund pioneer Ed Thorp, and I will offer up a fuller version of Thorp’s take on the current state of the business in a subsequent post.