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The Secret to Higher Expected Returns

Everyone wants higher returns. To many investors, success in investing means generating “alpha.” If you are an investor in mutual funds, that means trying to generate returns in excess of the benchmark index designated by the fund.

There are still many investors who participate in the pursuit of alpha, but the numbers are diminishing. In 1993, approximately 3 percent of investors owned passively managed funds, in which the fund manager simply tracked a benchmark index. That number steadily increased to almost 27 percent at the end of 2013.

Is there something these passive investors know that you don’t? Why have they thrown in the towel and abandoned the quest for alpha?

The answer to this question was fully explored in a thoughtful article by Julie Segal, which appeared in Institutional Investor on September 18, 2013. According to Ms. Segal, she decided to “research whether alpha — investment returns above what a plain old index fund would give you — was just a fairy tale that the investment industry told itself at bedtime.”

Read the rest of the article at The Huffington Post.

 

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