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HERAUSGEGEBEN VON WERNER D'INKA, BERTHOLD KOHLER, GÜNTHER NONNENMACHER, FRANK SCHIRRMACHER, HOLGER STELTZNER
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Are markets efficient? Fund managers say: Yes.

05.07.2012, 13:24 Uhr  ·  Fund management companies tend to employ their best people in inefficient markets - and these are not your everyday markets. Everyday markets seem to be too efficient. By Patrick Bernau

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Fund management companies tend to employ their best people in inefficient markets – and these are not your everyday markets. Everyday markets seem to be too efficient.

By Patrick Bernau

Are markets efficient? This hypothesis has become very controversial in the last years. I still like it, as I have repeatedly pointed out. Regarding markets as inefficient would require one thing: There must be some people who are able to consistently outperform the market. They must have a track record which is better than the track record people can get by pure chance. For Western markets, such people are hard to find – and it is even harder to proof that their success is not due to chance. (Interestingly, it is easy to find many fund managers who are worse than the markets.)

Foto: ddpBut now there is a new paper looking at empiric data. The study has been conducted by researchers of the Centre for Financial Research at Cologne University: Jieyan Fang, Alexander Kempf, and Monika Trapp. They do not calculate fund managers’ yields (this has been done before) – instead the authors take a look at who are the fund managers, how and where do they work.

Fang et al. ask: How are fund managers allocated? They try to measure the skill of fund managers and analyze where these fund managers are employed. In their study, the authors focus on bond markets. This is an asset category which has produced a bubble quite recently, the Euro crisis: Greek government bonds were priced far too high for far too long. But is this bubble a sign of an inefficient market? “By and large, western bond markets are efficient”, says the study’s co-author Alexander Kempf.

In order to get a proxy for the fund managers’ skills, Fang et al. use education for young fund managers (What is the manager’s alma mater? What is his GMAT score?) and past performance for more experienced managers.

Their finding is striking: Mutual fund companies tend to employ their most promising and most successful fund managers in difficult markets in which they can really earn money – and this is not standard western bond markets, but High Yield markets. Although Standard (Investement Grade) bond markets have higher volume, fund companies tend to employ their young, inexperienced and lesser-skilled fund managers on these markets.

It looks like skill doesn’t help too much on these markets.

The photo (source: dapd) shows the German stock market.
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0 the_fdik 10.07.2012, 07:13 Uhr

Patrick, are you...

Patrick, are you serious? "Might think there is a bubble" when everyone without a penny in his pockets gets a credit for a house without cash down and for an interest rate in the region of "we laugh about it"? "Might think there is a bubble" when you can see how they're building new cities, and they never go beyond the skeleton? We're talking about Spain, not Germany. Did you ever go there? Did you see the mess? Everyone could have done that who was interested. Most people in other countries didn't care. Now we have that mess. It was 100% clear what will happen some day. It's just untrue to deny that. And it was as clear as the "subprime crisis": this is not a natural catastrophe, it is just fraud. And of course it was all induced by intention. I'm happy to notice that at least in the US there is some jurisdiction including conviction for all those criminals. In Germany, in whole Europe no-one is caring about that. We're just "saving the banks" instead of prosecuting the banksters.

0 fionn 10.07.2012, 06:54 Uhr

The banking sector is...

The banking sector is "disproportionately influential" (see link below). Surely the above means that the working of a key sector in the economy is distorted? I don't think the word "efficiency" is appropriate anyway - and imo the proof is the immense self-inflicted damage caused by (especially the US/UK) banking sector to itself... http://www.guardian.co.uk/politics/2012/jul/09/finance-industry-lobbying-budget-revealed

0 faz-bern 09.07.2012, 17:01 Uhr

This is pretty simple. Of...

This is pretty simple. Of course, ex ante many people might think there is a bubble. But nobody knows for sure whether it really is one and if it is, how bad it will pop. If and when the bubble pops, the extent becomes clearer and markets go down. Don't forget ex ante insecurity. For example, the prices of German bonds have been called "bubble" for three years now, and nothing happened.

0 the_fdik 09.07.2012, 15:00 Uhr

Patrick, please give me an...

Patrick, please give me an example. Let's say, please explain the situation in Spain with the “efficiency of the market” theory. Hint: everyone knows for years about the real estate bubble there. Everyone with the exception of S&P, of course: they detected that a few weeks ago, and modified their rating “immediately”. And the “markets reacted”. Maybe this example can be more interesting than the ol' Warren Buffet story.

0 faz-bern 09.07.2012, 14:29 Uhr

ThorHa: We fully agree. You...

ThorHa: We fully agree. You are making exactly the point that I made in the two sentences after the one you quoted: "[Theses persons] must have a track record which is better than the track record people can get by pure chance. For Western markets, such people are hard to find - and it is even harder to proof that their success is not due to chance." You can find a lot about this in the study that I linked to. the_fdik: For a market to be efficient, it is not necessary that it is prescient. Asking for Fortune-telling is asking too much. The definition of an efficient market is that nobody knows better than the market - which in practice means: There must be more people performing better than the market than you would get by pure chance.

0 the_fdik 08.07.2012, 11:06 Uhr

The fairy tale of the...

The fairy tale of the “efficient markets” keeps going. Once apon a time there was Lehman Bros., and it was AAA+ rated. Who should believe in this nonsense any more? The “markets” are just human beings and a game they're playing with each others. And we humans are mainly emotionally driven. Whoever wants to argue that should first try to explain the success of Apple Computer with the “homo oeconomicus” theory. Good luck!

0 Freiwirtschaftler 07.07.2012, 08:49 Uhr

Die Marktwirtschaft ist...

Die Marktwirtschaft ist maximal effektiv und innovativ, wenn verdiente Knappheitsgewinne aufgrund eigener technologischer und kultureller Innovation nicht mehr durch unverdiente - auf Kosten der Mehrarbeit anderer erpresster - Knappheitsgewinne von Sparern, die sich für "große Investoren" halten, geschmälert werden können - wenn also die Marktwirtschaft durch eine professionelle Geld- und Bodenordnung vom parasitären Gegenprinzip des Privatkapitalismus befreit ist: http://opium-des-volkes.blogspot.de/2011/08/naturliche-wirtschaftsordnung.html

0 ThorHa 06.07.2012, 11:03 Uhr

@Patrick Bernau: Seems I was...

@Patrick Bernau: Seems I was not clear enough. Provided one can identify persons who consistently outperform the market, this gives 0 information on the abilities of the person outperforming AND/OR on the efficiency of said market. If the numbers (of persons acting in the market) are high enough, probability rules leave enough room for pure consistent luck, although the number of people being consistently lucky should and will decrease over time. Which means the basic assumption - "A market ist inefficient if there are persons who consistently outperform markets" - has no foundation, hence the conclusions drawn on the basis of such an assumption are wrong. Garbage in, garbage out. Regards, Thorsten Haupts

0 faz-bern 06.07.2012, 05:52 Uhr

There is one thing I should...

There is one thing I should have mentioned more clearly: In fact, fund managers are the least likely guys to admit that markets are efficient. If markets are more efficient markets, there is less reason to employ fund managers. This study is - as I mentioned - not only about promising young fund managers, but also about older fund managers who have been successful in the past, having delivered good returns. * Now, Egon One, there would be an alternative: If markets are efficient - buy ETFs. If markets aren't - employ a fund manager. * Schmeconomics, I would be happy if the public discussion really was about how efficient markets are. Nowadays, I often hear "Markets are inefficient, so we should not care about them". This is a problem. I think the study tells us something about the efficiency of IG markets. Not about the exact level of efficiency. But given the large volumes and the large investments in IG markets, fund managers would leave their good people there if these markets were not near-efficient. And I reject the claim that prices were inefficient in the LTCM crisis. Of course this is what LTCM managers say. But I have yet to see proof for this claim. * ThorHa: I do not understand most of your alternatives. Remember: A market ist inefficient if there are persons who consitently outperform markets. This does not happen. (Nr 1) As I see it, this question has little to do with earnings of average market participants, which can stem from fees. (Nr 2) This quesion is also irrelevant for whether people outperform markets - or am I wrong? (Nr 3) If markets were efficient most of the time, this would be a part of my point. Times of inefficiency are the times when smart people should earn money. (Nr 4) is exactly the point that Fama/French made in the paper I linked to.

0 ThorHa 05.07.2012, 20:03 Uhr

"Regarding markets as...

"Regarding markets as inefficient would require one thing: There must be some people who are able to consistently outperform the market." Aha. Es gibt zu dieser Sichtweise mindestens ebenso logische Alternativen. Eine davon wäre, dass Märkte derart ineffizient gestaltet werden, dass genügend hohe Margen auch für durchschnittliche Marktteilnehmer abfallen. Eine zweite, dass der Markt zwar an sich effizient ist, mächtige Marktteilnehmer aber den Marktplatzbetreiber dazu überreden können, versagenden Marktteilnehmern den verbleib auf dem marktplatz zu ermöglichen. Die dritte wäre, dass langfristig effiziente Märkte kurzfristig trotzdem völlig irrational und verrückt reagieren können, genügend Gelegenheit auch für die Smartesten, Geld zu verbrennen. Die vierte wäre, dass langfristig überdurchschnittlich erfolgreiche auch einfach Glück gehabt haben könnten, bei genügend grosser Teilnehmerzahl und der Annahme einer Gauss´schen Verteilung wird die Hypothese sogar wahrscheinlich. Aber das ist eh irrelevant. Nach der bombastischen Einleitung führt uns der Autor nicht etwa zu Outperformern, sondern nur zu High Potentials. Mit deren behaupteter Distribution in Märkten durch ihr Management soll dann eine Schlussfolgerung bestätigt werden ... Ja, wahrscheinlich sind Märkte effizient. Langfristig, ohne staatliche oder oligopolistische Marktverzerrungen. Und im Vergleich mit ihren Alternativen - unter den Blinden ist der Einäugig König. "Sind Sümpfe trockener Boden? Ja, sagen die Frösche ..." Märkte, in denen Marktversagen nicht zugelassen wird, sind qua Definition nicht effizient, weil sie es nicht sein können. Genau das aber gilt für die "effizienten" Finanzmärkte. Und für diese Feststellung brauche ich nicht einmal die empirische Beobachtung von High Potentials. Gruss, Thorsten Haupts

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