There’s No Such Thing as Being Market Neutral

One of the important truths about investing is that there’s no such thing as truly being “market neutral.” Any investment takes some sort of angle on the market. Even doing nothing and having your money sit in the bank is, ironically, playing some market.

This year, actively managed funds are having their worst year against the market in 30 years. Lipper reports that 85% of actively managed large-cap funds are lagging their benchmark.

But that’s not due to managers being bad at their jobs. At least, that’s not the only reason. What we don’t often hear is that the relative performance of active managers is very strongly correlated with the relative performance of small-cap stocks (yes, even among large-cap funds). Actively managed funds tend to be over-weighted with small-cap stocks. When small-caps soar, active managers look smart. But when they break down, they don’t look so good.

But it doesn’t end there. The relative performance of small-caps is semi-strongly correlated with the U.S. dollar. When the dollar rises, small-caps lag. Putting it all together, actively managed funds are having a bad year partially related to the dollar’s rally. That, in turn, is related to efforts in Japan and Europe to weaken their currencies.

Everything’s related to everything else.

Posted by on December 2nd, 2014 at 1:07 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.