David and Goliath: Who Wins the Quantitative Battle?

Abstract

Today’s hedge fund managers, armed with PhDs, complex algorithms, massive databases, and lightning-fast trading capabilities—and high costs—are the Goliaths of the financial industry. The humble index fund is the David of investing, armed only with simple arithmetic and a buy-and-hold strategy but free of the heavy weight of high fees and expenses. Does the underdog David of investing stand a chance against the imposing Goliath? Or does Goliath’s heavy cost burden give David the edge in the battle for superior returns? This article discusses the history of index investing and evaluates the relative success of hedge funds and broad-market index funds.

TOPICS: Mutual funds/passive investing/indexing, real assets/alternative investments/private equity