Despite superb returns for global equity markets, 2013 was the most difficult year for stock pickers in decades, according to Tim Edwards, a director in the index investment strategy team at S&P Dow Jones Indices.
Edwards says that while the average hedge fund recorded fairly solid gains over the year, such performance paled in comparison to the rampant equity markets.
It was also a year that saw historic lows for the potential returns available from the expert selection of securities.
“By some measures, it was the toughest year for stock pickers in decades: rarely in history did the average stock deviate so little from its peers, or from the market,” says Edwards. “The average dispersion between S&P 500 stocks over the 12 months of the year was just below five per cent, which is the lowest value across the 23-year data set we’ve collected.
“In such circumstances, the relative value of active management in the equity markets is constrained. Simply put, accurate bets deliver less alpha. We recently predicted that assets in broad-based index trackers (ETFs in particular) would grow or have already grown larger than the entire hedge fund industry. December’s numbers are now in for both industries, and it seems that investors have been voting with their feet in favour of our prediction. With the current lack of opportunities facing active managers, who can blame them?”