Fama takes slap at active management

Finance star calls active management "zero-sum game".
OCT 13, 2013
Eugene Fama, a man widely regarded as the father of modern finance, last Monday held firm to his staunch opposition to active management and high fees while advocating a simplified system of asset management. “Active management is a zero-sum game before cost, and the winners have to win at the expense of losers,” he told an audience of financial professionals at the Investment Management Consultants Association's Advanced Wealth Management Conference. Asked where he thinks alternative investments belong in a portfolio strategy, Mr. Fama, Robert R. McCormick Distinguished Service Professor at the University of Chicago's Booth School of Business, first emphasized his distaste for any strategy that self-reports performance, then elaborated by saying that he can't understand why hedge funds are attracting assets.

No laughing matter

“I can't figure out why anyone invests in active management, so asking me about hedge funds is just an extreme version of the same question,” he told the audience. Although many of his responses drew laughs, Mr. Fama wasn't joking in his criticism of what he views as bad investment decisions. “Since I think everything is appropriately priced, my advice would be to avoid high fees. So you can forget about hedge funds,” Mr. Fama said. He contends that diversification and asset management are unnecessary and that investments can be limited to U.S. index funds. “It doesn't matter that much,” Mr. Fama said of investing outside U.S. markets. “If I were to take the U.S. market and combine it with all other markets, the effect on return would be minimal,” he said. “The U.S. market is so well-diversified already that combining it with global markets doesn't really matter.” Mr. Fama dismissed market concerns about the beginning of tapering of the five-year quantitative-easing program as a non-issue. Citing the strategy of buying short-term debt in order to finance the purchase of long-term debt, he said: “I don't understand why everyone is paying attention to this tapering,” Mr. Fama said. “The Fed is using one kind of bond to buy another kind of bond,” he said. “What's the big deal, and why is anyone taking the Fed seriously?”

Latest News

RIA dealmaking accelerates as three firms hit AUM milestones
RIA dealmaking accelerates as three firms hit AUM milestones

Wealth Consulting Group, Coastline and Maridea report fresh capital, acquisitions and asset growth as advisor M&A keeps climbing

VastAdvisor closes $1 million SAFE round from advisor-side backers
VastAdvisor closes $1 million SAFE round from advisor-side backers

Carson Group's Dani Fava, Jason Pereira of Woodgate Financial, and Sally George of Convergency Partners led the raise as the growth-tech startup builds out its AI platform and leadership bench.

Wells Fargo adds three advisor practices as recruiting rebound continues
Wells Fargo adds three advisor practices as recruiting rebound continues

New teams from William Blair, Ameriprise and UBS bring more than $560 million in combined client assets to the firm's employee and independent channels.

UBS will pay advisors 'handsomely' for banking starting next year
UBS will pay advisors 'handsomely' for banking starting next year

Regulators this year approved UBS Bank USA’s conversion to a nationally chartered bank.

SEC accuses Tricolor executives of hiding $800 million collateral hole
SEC accuses Tricolor executives of hiding $800 million collateral hole

How a subprime lender’s car-loan bonds allegedly unraveled before bankruptcy.

SPONSORED Direct indexing webinar targets tax-loss harvesting amid market swings

Northern Trust’s Ken Lassner shows advisors how to convert volatility into after-tax portfolio gains

SPONSORED Who builds the income when the pension disappears?

Dan Biagini of American Equity says the steady decline of pensions, longer lifespans and a reset in interest rates are rewriting how advisors build retirement income