Everything Old is New Again, The "Value" of Active Investment Managers Edition
First, there was Fred Schwed’s Where are the Customer’s Yachts?, which is still the standard bearer for why Money Managers are overpaid.
Now (via the NYT) there is The Investment Answer (preface here [PDF]).
The Prologue opens more Matt Taibbi than Jason Zweig:
Wall Street brokers and active money managers use your relative lack of investment expertise to their benefit…not yours
Of course, they have a method That Will Work to solve this, which looks suspicuously like what those Active Money Managers say they do. And what you would think Economic Theory would tell you to do, which may be why they have the endorsement of Eugene (“the markets are too efficient”) Fama among many others.
Perhaps it’s time for economists to model why economic theory doesn’t work?
The last time people realized their money managers were taking them for a ride, the market basically sat still for a generation. Whether this dying text is a leading indicator is left as an exercise, though not an academic one.
It goes beyond “endorsement”:
Professor Fama remains involved in the operations of the firm by serving on the board of directors of Dimensional Fund Advisors. He is also a member of its Investment Policy Committee, and in this capacity continues to advise on many of the firm’s strategies.
Personally, I find the work on alternative strategy managers more interesting in this regard. Metrick & Yasuda’s paper on Private Equity forces efficient markets into it’s models claiming that LPs can’t be better off investing in PE relative to indexed public equities. Goetzmann, Ingersoll, and Ross have a formula calculating the NPV of hedge fund revenues to the GP, which if memory serves, concludes that LPs should be relatively indifferent at around 300 bps of alpha.