How a cat beat professionals at stockpicking

A teachable moment.

The Observer spent 2012 challenging a panel of professional stockpickers – a wealth manager, stockbroker and fund manager – to beat schoolchildren and a cat at making a profit from the stock market. The cat won:

Each team invested a notional £5,000 in five companies from the FTSE All-Share index at the start of the year. After every three months, they could exchange any stocks, replacing them with others from the index.

By the end of September the professionals had generated £497 of profit compared with £292 managed by Orlando. But an unexpected turnaround in the final quarter has resulted in the cat's portfolio increasing by an average of 4.2% to end the year at £5,542.60, compared with the professionals' £5,176.60.

Click through for some awful puns.

Naturally, this is a teachable moment. Matt Yglesias points out that, even if the cat had lost, once fees are factored in it would almost certainly have beaten the professionals. The traditional "2 and 20" fee of hedge fund managers – that's two per cent of the investment and 20 per cent of the profit – is easily enough to turn a market-beating fund into a market-losing investment.

But the cat may have been aided by the year in which the competition took place. Zero Hedge reports that, over 2012, the S&P rose 16 per cent, meaning that:

A whopping 88% of hedge funds, as well as some 65% of large-cap core, 80% of large cap value, and 67% of small-cap mutual funds underperformed the market.

Barron's explains why a strong index is bad for hedgies:

Hedge funds typically lag behind broader indexes slightly during years with double-digit S&P gains—they do have to hedge, after all—but it's rarely by this much.

Managers across all strategies are concerned about another 2008-like market crash, but in the meantime, they've been hurt by central banks' persistence at keeping interest rates low. Add in volatility and a U.S. presidential election where the top three issues are the economy, the economy, and the economy, and it's clear that hedge-fund managers are more concerned about managing risk than gambling on equities. Investors and other industry observers say that for perhaps the first time since the phrase hedge fund entered the lexicon, hot or gimmicky strategies aren't worth investing in at all. It's the manager that counts.

The cat was picking from the FTSE rather than S&P, but much the same lessons apply. Markets have performed well this year; gimmicky stockpicking strategies haven't; and, of course, there was a healthy dose of feline luck.

But maybe hedge funds and stockpicking are always over-valued? Warren Buffett thinks so; he made a $1m bet in 2007 that:

Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S&P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.

That's critical of funds-of-funds – which add another layer of returns-destroying fees – but it's representative of a growing trend. If you must invest in something more complicated than an all-shares index, try a dart-board and a list of stocks.

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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After a year of chaos, MPs from all parties are trying to stop an extreme Brexit

The Greens are calling for a cross-party commission on Brexit.

One year ago today, I stood on Westminster Bridge as the sun rose over a changed country. By a narrow margin, on an unexpectedly high turnout, a majority of people in Britain had chosen to leave the EU. It wasn’t easy for those of us on the losing side – especially after such scaremongering from the leaders of the Leave campaign – but 23 June 2016 showed the power of a voting opportunity where every vote counted.

A year on from the vote, and the process is in chaos. Perhaps we shouldn’t be surprised. The Leave campaign deliberately never spelled out any detailed plan for Brexit, and senior figures fought internal battles over which model they preferred. One minute Britain would be like Norway, then we’d be like Canada – and then we’d be unique. After the vote Theresa May promised us a "Red, White and Blue Brexit" – and then her ministers kept threatening the EU with walking away with no deal at all which, in fairness, would be unique(ly) reckless. 

We now have our future being negotiated by a government who have just had their majority wiped out. More than half of voters opted for progressive parties at the last election – yet the people representing us in Brussels are the right-wing hardliners David Davis, Liam Fox and Boris Johnson.

Despite widespread opposition, the government has steadfastly refused to unilaterally guarantee EU citizens their rights. This week it has shown its disregard for the environment as it published a Queen’s Speech with no specific plans for environmental protection in the Brexit process either. 

Amid such chaos there is, however, a glimmer of hope. MPs from all parties are working together to stop an extreme Brexit. Labour’s position seems to be softening, and it looks likely that the Scottish Parliament will have a say on the final deal too. The Democratic Unionist Party is regressive in many ways, but there’s a good chance that the government relying on it will soften Brexit for Northern Ireland, at least because of the DUP's insistence on keeping the border with Ireland open. My amendments to the Queen’s speech to give full rights to EU nationals and create an Environmental Protection Act have cross-party support.

With such political instability here at home – and a growing sense among the public that people deserve a final say on any deal - it seems that everything is up for grabs. The government has no mandate for pushing ahead with an extreme Brexit. As the democratic reformers Unlock Democracy said in a recent report “The failure of any party to gain a majority in the recent election has made the need for an inclusive, consensus based working even more imperative.” The referendum should have been the start of a democratic process, not the end of one.

That’s why Greens are calling for a cross-party commission on Brexit, in order to ensure that voices from across the political spectrum are heard in the process. And it’s why we continue to push for a ratification referendum on the final deal negotiated by the government - we want the whole country to have the last word on this, not just the 650 MPs elected to the Parliament via an extremely unrepresentative electoral system.

No one predicted what would happen over the last year. From the referendum, to Theresa May’s disastrous leadership and a progressive majority at a general election. And no one knows exactly what will happen next. But what’s clear is that people across this country should be at the centre of the coming debate over our future – it can’t be stitched up behind closed doors by ministers without a mandate.

Caroline Lucas is the MP for Brighton Pavilion.

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