The main pitfalls in inferring from historical performance include the following.
1, potential risk
The main manifestation of misleading historical performance is unknown risk. During the duration of a fund, the investment strategy may have exposed the risk of a small probability event, but it happened that this event did not happen during this period, so the historical performance was not reflected. In this case, the historical performance is not representative, or extremely misleading. The core concepts here have been discussed in Chapter 4.
2. Data-related traps
Figure 6- 1 shows the strong rise of the bond market in the past 30 years. Imagine: in the widely used portfolio optimization model, bonds are used as investment targets. Under the given volatility (as a risk measure), the portfolio optimization model will give a portfolio with the highest expected return. The results of this model are calculated according to the expected returns and volatility of various investment targets in history and their correlation. Generally speaking, the stronger and more stable the upward trend of bonds, the higher the proportion in the optimal portfolio.
Figure 6- 1 main continuous contract of US Treasury futures
Note: The continuous contract chart of futures main force shows the change of net value of long positions holding treasury bonds futures continuously, and the contract extension price adjustment is considered.
There is an implicit assumption in the portfolio optimization model: historical data is a reliable basis for future decision-making. Is this assumption reasonable? Specific to bonds, how strong is the correlation between the performance of the past 30 years and the future performance? The long-term bull market in the bond market is driven by the commodity bear market since 1980 and the low inflation in the same period. Although the commodity market has bottomed out since 2002, inflation is still low, thanks to the economic crisis in 2008 and thereafter. The long-term bull market of bonds (or the long-term decline of interest rates) is synchronized with the general trend that the double-digit inflation rate dropped from 1979 to 1980 to below 2% at the end of 2008.
However, the future prospects of bonds seem to have nothing to do with past historical performance. The bond interest rate dropped from 198 1 to the current 15%. No matter how to spread the wings of imagination, the space for future decline is extremely limited. For the future forecast, the past interest rate decline (bond rise) is not only not instructive, but also an "impossible" indicator. It is hard for us to imagine that the interest rate will drop from 3% to-12% in the next 30 years. On the contrary, after a long-term sharp drop in interest rates, it is very likely that there will be a big reversal. Thanks to the strong demand brought by the rapid development of the world economy, commodity prices have reversed, forming a long-term upward trend. So far, due to the high unemployment rate, the inflation rate is still very low despite the rise in commodity prices. However, with the improvement of unemployment rate, the inflation rate seems to be rising again. In addition, the delayed effect of loose monetary policy is superimposed on the concern that high debt may lead to long-term inflation and rising interest rates (that is, falling bond prices).
Ironically, what played a major role in the bull market in the past may be the cause of the bear market in the future. In the past, the bond bull market was due to the fact that interest rates have fallen from a very high position to a very low position for a long time, and there is very limited room for decline in the future, so the possibility of entering an upward track will be great. Moreover, the long-term decline in interest rates shows that interest income has been reduced in an all-round way. In this context, the high-spirited trend of the bond market in the past 30 years is more like a reason why bonds will continue to fall in the future than a reason to increase the weight of bonds in the portfolio.
Historical achievements are only useful when history can infer the future. However, many times, we have no reason to make such an assumption. As in the case of bonds, sometimes past historical performance is actually a reverse indicator. Don't use historical performance as the basis of investment decision until you know how to infer the future from the past.
3. Excessive rate of return may be a bad thing.
Excellent profit performance is not necessarily a good indicator. Sometimes, the high rate of return reflects that fund managers tend to take more risks than their excellent management skills. Let's take a look at the long/short star fund managers in 1998 ~ 1999. Fund managers with heavy positions in technology stocks (especially online stocks) will outperform the market by a large margin. During this period, the higher the risk exposure-holding internet stocks heavily-means the higher the performance. The market gave excessive returns to fund managers who held overvalued stocks with worthless fundamentals, which led to higher prices of these stocks. The performance of fund managers who are cautious and avoid excessive speculation is much lower than the market. Therefore, investors who choose fund managers in early 2000 are likely to choose the portfolio with the greatest risk rather than the portfolio with the highest management skills. Most of the fund managers who performed best in 1998 ~ 1999 suffered heavy casualties in the internet bubble that began in March 2000, and the whole technology sector fell sharply until 2002.
Another outstanding example from excessive risk rather than management level is the hedge fund that adopted the credit spread strategy from 2003 to 2007. Many hedge funds, which are good at investing in high-yield bonds, have performed well because of the difference between debt income and capital cost. Using leverage, the profit brought by the price difference has doubled. Success is Xiao He, failure is Xiao He. Leverage can increase profits, but with the narrowing or expanding of credit spreads, the gains and losses of capital costs will be enlarged simultaneously. From 2003 to 2007, the credit spread of high-yield bonds gradually narrowed, which means that capital gains increased interest income. Those fund managers who use the highest leverage and bear the highest credit risk benefit from both interest income and capital income (due to interest spread). Because the credit spread has not expanded sharply to reflect the long-term exposure risk, the additional risk of increasing leverage is not significant. According to the historical performance of the past 3-5 years, in the middle of 2007, investors who choose credit spread hedge funds are likely to choose those institutions that bear the greatest credit risk rather than those with the highest management skills. Sadly, the sharp expansion of credit spreads led to multiple losses under leverage, and those hedge funds that took the biggest credit risk performed extremely badly in the following two years.
The investment trap is that sometimes the outstanding performance in the past actually reflects negative and excessive risks, rather than positive and extraordinary management skills. If the market conditions are very favorable, excessive investment risks will not be found-very coordinated market conditions will bring excellent performance. In addition, some extreme market conditions encourage speculation (for example, the Internet bubble and the credit spread bubble), and these carnivals greatly increase the possibility of future market inflection points. In this case, the past is not only unrepresentative but also seriously deceptive. Investors must understand the reasons for outstanding performance and reasonably judge whether they can continue their glory in the future. At the beginning of 2000, the performance curve of fund managers with heavy positions in internet stocks may be beautiful, but only investors who understand the reasons behind it can be alert to this risk. As Paul Rubin pointed out, "Never be carried away by the halo in the bull market".
4. No comparability
Considering the following two candidate funds in the strategic pool, we take the maximum withdrawal amount as the main selection criterion.
(1) fund a: the maximum withdrawal is 25%.
(2) Fund B: maximum withdrawal 10%.
Which fund is riskier? Many readers may think this is a naive question. Isn't it obvious that the risk of fund B is small? Wrong, not necessarily! In fact, the above information is completely insufficient to answer this question. Suppose we provide more information, as follows.
(1) Fund A: the maximum withdrawal is 25%, and the historical performance time is 7 years.
(2) Fund B: maximum withdrawal 10%, and historical performance time is 3 years.
If the historical performance of the fund with smaller retracement is short, we can't actually judge which fund is less risky. If the maximum withdrawal of fund A in the last three years is only 5% (compared with 10% of fund B), it seems that the risk of fund A is less. The problem here is that if fund B also has a history of 7 years, we don't know what its maximum withdrawal is: it may far exceed the maximum withdrawal of fund A. ..
To be fair, comparisons must be based on the same time period. Like the above example, if the maximum retreat is the main comparison criterion, then the comparison must start from the performance points of the two, not from their respective starting points. The same is true of other comparison standards.
Suppose we want to compare the average annualized compound rate of return of two hedge funds holding multiple stocks. Fund A starts from 1995, and Fund B starts from 2000. If we compare from their respective starting points, then Fund A has great advantages, because it has been traded in the bull market in previous years, while Fund B has not. In this example, funds with long historical performance gain an advantage; But in other cases, the result is just the opposite. For example, the foundation that started operation in the middle of 1997 suffered a lot more than the fund that started operation in the early period of 1999, because it experienced the bear market of 1997 ~ 1998. Similarly, aligning the starting point can also avoid the misunderstanding of comparison.
The comparison of funds must be based on the same benchmark, please remember the following principles.
(1) time period. As mentioned in the above example, if the two funds start from different points, then the statistics must be calculated from the historical performance of the two funds in the same time period.
(2) Strategic style. It is meaningless to compare two funds with different strategic styles because their performance often depends on the corresponding market characteristics. It is inappropriate to compare hedge funds with fixed-income arbitrage funds. Because in the rising market, the former has a huge advantage; In the declining market, the latter has a huge advantage.
(3) the market participating in the transaction. Compared with management skills, the market environment often has a greater impact on performance. Even if two fund managers adopt the same trading strategy, if they trade in different markets, the performance results will be very different. For example, suppose two hedge funds (CTA) trade trend-following futures, one only trades commodity futures, and the other trades foreign exchange futures. When there is a huge trend in one market and the other market fluctuates within a narrow range (a market environment where it is very difficult to make money), the comparison results actually only reflect the trend characteristics of the market, not the management level of the fund.
5. Too long historical expression often loses its meaning.
It is generally believed that a long historical performance will be more convincing than a short historical performance. This common sense is not necessarily completely correct. A longer historical performance may be unrealistic for the following reasons.
(1) The strategy and combination have changed. The rapid growth of asset management scale will make great changes in investment strategy and trading market. For example, long and short stock hedge funds often benefit from the rapid growth of small-cap stocks. With the growth of management scale, positions are forced to migrate to stocks with larger market value; Small-cap stocks were forced to lower their positions or give them up completely. This move may greatly reduce the future performance of the fund. Therefore, the historical performance of early years is not convincing for the current management style; In other words, using too long historical performance may overestimate the future potential of the fund.
(2) The strategic efficiency has declined. The main driving force of a fund's brilliant performance in its early years is likely to decline due to changes in market structure or the entry of competitors. Therefore, because the previous market environment was more favorable, the yield in the early years would be much higher than in recent years. Unfortunately, I didn't come yesterday. A good example is the long-term impressive performance of CTA, which is a trend tracking strategy. In 1970s, 1980s and early 1990s, the annualized income of trend tracking CTA was much higher than the market average. With the entry of more CTA funds using similar strategies, the income/risk ratio of such strategies is greatly reduced. Generally speaking, the performance of CTA funds, which started in 1970s, will be much higher than the current level. We often see the watershed of historical performance, which is brilliant before and unremarkable after. Because it is difficult to reproduce the market environment that contributed to brilliant achievements, it seems to be "the moon in the water, the flower in the mirror" to take the corresponding historical achievements as evidence of future potential.
(3) The fund manager has changed. Funds with long-term historical performance often change fund managers. Over time, the founding manager of the fund is likely to be promoted to a management position because of his successful performance, and hire or assign other fund managers to take charge of the fund. Sometimes, former fund managers may retire in part or in whole. At other times, in a large organization, although the former fund manager left his post or was replaced by another person, the fund was still in his name. When the manager of the fund has undergone major changes, the previous historical performance is generally meaningless or even subversive.
Any of the above reasons can lead to a long historical performance, which is not more convincing than a short historical performance.
Investment misunderstanding 1: It is reasonable to take historical performance as the basis for future investment decisions.
Truth: As we pointed out in the bond example, if there is reason to believe that the historical conditions that helped outstanding performance in the past will not reappear in the future, then historical performance is meaningless. Similarly, if we have reason to believe that the investment strategy that helped outstanding performance in the past will decline, then historical performance is not credible.
◆ Investment misunderstanding 2: The historical high return under the medium retracement is generally an advantage.
Truth: Sometimes, the high rate of return actually reflects taking too high risks in a favorable market environment, rather than superb asset management skills. If the risk is a small probability event, but it is not encountered during the duration of the fund, then the evidence shown by historical performance is not enough. Understanding the source behind the performance is very important for analyzing the future potential.
◆ Investment Misunderstanding 3: In quantitative evaluation, fund managers with high return/risk ratio perform better than those with low return/risk ratio.
Truth: It is often seen that the historical performance of different fund managers starts from different time nodes, and their performance is often determined by the performance of non-overlapping time periods. The correct method should be to compare only the same time period (instead of starting from their respective starting points). In addition, the comparison between fund managers who trade in the same market and adopt similar strategies is meaningful.
◆ Investment misunderstanding 4: The longer the historical performance, the more meaningful it is.
Truth: Sometimes, if there are major changes during the management period, the longer the historical performance, the smaller the significance. In fact, the longer the management period, the greater the possibility of major changes.