Are You Smarter Than A Public Pension Fund Manager

From the WSJ:

Some $333 billion moved into all U.S.-listed ETFs [exchange traded funds] in 2017 through September, a figure that eclipses last year’s $288 billion all-time high with three months yet to be tallied, according to Morningstar.

Of that amount, 73% has gone into ETFs that boast expense ratios less than or equal to 0.2%, or $20 per $10,000 invested, according to Morningstar data through September. Such low-fee funds account for just 15% of the more than 2,000 exchange-traded funds and notes on the market....

The market for low-cost funds, long dominated by BlackRock, Vanguard Group and State Street Global Advisors, is getting increasingly crowded as other players attempt to muscle in. State Street last month slashed management fees on more than a dozen of its funds. Franklin Templeton Investments, a unit of Franklin Resources, this week announced 16 ultra-low-cost foreign stock ETFs that will undercut the management fees of nearly every rival product currently on the market.

“It’s become insanely competitive,” said Ben Johnson, head of ETF research at Morningstar.” Mr. Johnson said that advisers and other intermediaries are feeling the pressure to emphasize the lowest prices available. “This has upped the ante for providers of products that have really been commoditized.”

If you are a typical investor, you too are likely investing in lower-cost funds, and for most of us that is a great choice.  But large public pension funds are still the #1 largest investors in hedge funds, whose absurd 2 and 20 (2% of the assets invested, 20% of the gains, 0% of the losses) fee schedules still exist, incredibly, despite their systematic under-performance of the market.  I have always wondered how these fees don't get competed down.  But beset by under-funding, public pension funds are so desperate for yield to try to close the gap that they will still fall for the hedge fund pitch.  Which is why your local public teacher pension fund probably helped build a number of the mansions in Greenwich.  You do have to sort of respect folks who figured out a financial model for profiting in direct proportion to government fecklessness.  Talk about hitting the mother load!


  1. Aggie -:

    This should all work really well, at least until a major correction in the markets, when the bottom falls out for ETFs, which probably couldn't happen. But that's none of my business.

  2. Joe - the non investment manag:

    The current selling point of hedge funds is that they can do better job controlling the downside risk. So when the markets make a correction (whether it is a hiccup or full correction) the hedge fund values will drop significantly less than the overall market. That did not happen during the 2008 crisis when a significant number of hedge funds imploded. Suposidley, most hedge funds changed their strategy such that the leverage which caused the implosion has been removed. It should be noted that a significant number of money managers manage the risk by simply moving to cash and/or to a higher cash position

  3. Conqueror of All Foes Cheese:

    ETFs don't allow for enough scamming. The Detroit City pension funds were riddled with insider dealing.

  4. kidmugsy:

    Am I smarter than a public pension fund manager? A better question is whether I would be smarter than a public pension fund manager if I were subject to the same incentives.

  5. Dan Wendlick:

    The problem is that most of today's hedge funds aren't truly hedges. They're just high-leverage investment funds. The notion that a hedge should be an offset got lost sometime in the 1990s. A true hedge is a leveraged position that will pay off in the event an unanticipated event tanks a prime investment. My canonical example is taking options on crude oil to offset a position in airline stocks, as moving oil prices directly affect the profitability and thus share price of airlines in a more or less predictable way, where a spike in oil prices will tank your shares in United or American.

    The point is that over time you should expect to lose on your hedge positions and make money on prime investments. A true hedge fund should consistently perform counter to the market.