You’re probably aware that no fund manager would accept your offer. But it doesn’t prove that they don’t think they can beat the market (as misguided as that belief might be), it just means they’re not willing to take on an absurd amount of risk to prove it.
Exactly. No point being the one taking the risk - if the professionals don't dare take the risk then any non-professional (fund buyer) shouldn't either (under normal circumstances).
PS. Furthermore, an accurate comparison is not beating the index, it's beating it enough to cover the salary/compensation of the fund manager + some (with less risk! Risk = cost!)
Well I think many fund managers regularly take on risk to achieve higher returns. They just won’t take on 100% downside risk while being taxed 10% on the upside.
I think this gets at a deeper point I'm trying to make.
If you truly can consistently beat the market, you are already making a killing with your _own_ money.
If you want to use _my_ money to place your bets (presumably b/c you want to leverage your market beating ability), I want a guarantee (because I'm more than happy to take the return of the index).
I follow, essentially you're viewing it like a loan + interest + a minor stake in the venture. If the venture fails, you still expect to repaid loan + interest and your stake in the venture is worth $0.
Unfortunately no one will agree to this as long as everyone else is willing to invest _and_ shoulder the risk
It sounds like they're simply critically evaluating the claims of beating the market.
If you can't beat the market with your own money, you shouldn't be trying to do it with someone else's.
If you can beat the market with your own money, why are you so worried about the downside? There should be little risk for someone who claims to be able to beat the market.
If they say that's too much risk, they likely don't think they can consistently beat the market.
That's right, fund managers expect their clients to take 100% of the downside risk and tax their clients 20% on the up side.
Where I disagree with you is that fund managers regularly take risk. They never take risk themselves, rather they supply all of the risk to their clients.
You've just found a way to restate "they don't truly believe they can (consistently) beat the market."
On the flip side-- a passive fund manager would take 100% downside risk of the fund failing to properly track the index, and only in return for a modest fee. Stated differently-- passive funds can and do consistently track the market.
I don't think the risk is "absurd". Or, at least it's no different than the risk they ask any investor to take by charging them 1% of their portfolio for it to be "actively managed".
Plus, they are being compensated. I'm offering 90% of the returns above the index :-)
Active funds ask investors to accept 100% of the downside and get taxed on the upside. Actually it’s worse: they’re taxed on both the up and down sides.
If this is a terrible deal for fund managers then virtually by definition actively-managed funds are a terrible deal for investors.
The risk your (completely hypothetical) offer would involve is reputational. There's no reason for a funds manager to ever risk their reputation on your stunt since they are constantly risking money and reputation in the ways that they control. Indeed, one could almost certainly put together a bet similar to yours using derivatives and have the potential upsides and downsides without the reputational damage.
Of course, if you offered your bet to all comers and gave significant publicity, unknown "funds managers" would be happy to take you up, though they might well default if they lost.
In my eyes, "we have sincere faith in our ability to sustain higher-than-market returns on average" and "our risk management calculations tell us that we will have beat the market on average with very high probability" are the same statement.
