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Tuesday, October 17, 2017

Richard Thaler and Your Investments

Richard Thaler's Nobel Prize is yet another sign of the growth of behavioral economics as a dominant part of the field of economics. Others behavioral economists that have won the Nobel Prize was Daniel Kahaneman (2002)Kahneman was actually a Psychologist and Thaler's mentor,, and Robert Schiller(2013). The fact that both Schiller and Thaler have been heads of the American Economists Association says much about the "mainstreaming" of behavioral economics.

Thaler put his findings susinctly "the only people that think humans are rational are economists" Or as I like to say "it ain't physics"Thaler's latestbook Misbehaving gives his intellectual biography and thus a history of the field. His previous book(written with Cass Sunstein Nudge showed how public policy and other decisions can influence behavior and was used in both the UK and US as an input to policy decisions. In my view it was the only case in which policies based on an academic economist were implemented and led to results which virtually everyone views as positive,

I would put the findings of Thaler into two categories of relevance to investors:

Forced savings: the most practical implementation of Thaler's theory was his success in getting 401k plans to incorporate automatic enrollment thus implementing automatic payroll deductions to go into a retirement account (of course people are free to opt out..but the overwhelming number do not do so). Based on a "rational economic man" expectation there would be no difference in the number of employees enrolling in such plans if there was a choice available or if the enrollment was the automatic/default selection. Of course if that wasn't the case and there was no open enrollment the theory would be proven wrong in 401k plans increased tremendously when the automatice deductions was implemented. Regulations regarding 401k plans were altered in 2006 to allow plans to have automatic enrollment and participation by employees has increased as a consequence.T

The implications for individual investors is clear the more one sets up an automatic transfer from checking/savings accounts into an individual investment account the better for building a retirement portfolio (rather than making decisions about each transaction. Also it makes sense to opt for the maximum possible 401k contribution (which is not the default option in automatic enrollment plans)

Investor behavior. 

Loss Aversion. In a 'rational world" an investor would always choose the possibility of a coin flip (investment) in which there was a 51% chance of a gain of $101 and a 49% chance of a loss of $100 (higher expect return for the former) but in fact the number at which investors would demand a gain far larger than the loss to make the rational (higher expected return) choice tolerate a potential loss in  is far far higher.  Investors feel more pain about a loss than pleasure at a gain, Not surprisingly one of the consequences for this that  the more often an investor checks his account value (more likely to find short term losses) the more often he will sell his investments.

What is the consequence of the above ? Investors systematically under allocate to stocks relative to bonds given the risk return characteristics of stocks and bonds. This is particularly the case if investors are presented with short term data as to past behavior of stocks and bonds (which of course show more down periods than long term data). This behavior could also explain "busts": sharp down moves in assets as investor show loss aversion. In my personal experience working with clients I have at least two take aways: when presenting allocation proposals to clients stress long term data and the commitment to have discipline and 2. the academic measure of rik "standard deviation over a one year period is and should be irrelevant to most investors. Since the investor should have a long term focus why should the one year fluctuations of an investment be an important input to their discussion (also long term investments dont fit a bell curve distribution...but that is another more academic discussion.

Loss Aversion does have another nuance: past outcomes influence current decisions.

House money effect: Investors tend to take more risks when playing with "house money" i.e. gambling with profits. Rationally the decision to invest aggressively/take more risk simply because there are already profits in the account is irrational there should be no difference where the new investment money comes from. But investors don't behave that way. That likely explains bubbles and momentum in markets.

By the way it  could explain why Thaler has stated that he is concerned about current market levels its continual rise  with low volatility yet markets go higher and it seems investors continue adding to their stock allocation.

Break Even effect: Investors are prone to take more risks when presented with the possibility to make back the money lost.

All of the above factors should not influence investor behavior if they were rational decision makers the "homer economicus" of classical economics...but they do.

Furthermore all of the above factors work against the investor making the proper allocation policy: rebalancing by selling some of their winning positions and buying more of the losers. Everything described above moves investors to buy high and sell low.

Smart Beta, Thaler, and Your Portfolio:

"Smart Beta"
is a hot term in finance although many of these factors have been known for quite awhile and have been available to investors through passive vehicles

The value factor:

 Data shows that over the long run value and particularly small cap value stocks outperform the overall market. The explanation for this is likely at least in part behavioral investors: overreact to losses and bad news which causes price declines and are drawn to stocks with recent high performance. and investors are drawn to "hot  stocks" that are in the news and have had recent large price gains --the exact opposite of  vale and small cap value stocksThis leaves "value" stocks based on measures like low price/book or p/e, particularly small cap value stocks   to have good long term performance...but likely periods of shorter term underperformance. Dimensionsal Fund Advisors was the first to offer passive/index vehicles weighted towards these factors. They are now available at very low cost through a number of value ETFs large cap and small cap using a variety of methodologies.


Another factor that has been clear in market data has been momentum:,the tendency of markets and asset classes to perform in trends. This factor has long been used in "technical analysis" which academics have dismissed as voodoo for many years. More systematic research has indeed shown a momentum effect leading even the most  stubborn of "efficient markets" advocates Nobel Prize winner Eugene Fama to admit he couldn't find a rational(risk/reward based) explanation for this behavior. It would seem that the house money effect is at least one of the factors at work here. The behavioral explanation is clear investors extrapolate expectations of future performance from recent short term performance..which in turns adds to the "herd effect" in markets. As the market rises and the investors have gains in their portfolios they are more willing to take risks and purchase additional stocks..even riskier ones.

Momentum ETFs which purchase individual stocks based on their short term momentum and sell them when the momentum ends attempt to take advantage of this anomaly. Momentum factor ETFs are a more recent phenomenon and can be accessed with an ETF like MTUM which carries a management fee of .15% Momentum shows its best performance in strong up markets thus it is not surprising that momentum has not only outperformed a market cap weighting but also the other smart beta factors..over the past 3 years by a significant margin (total return of 66.5% vs. 44.5% for the cap weighted index).

Low/Minimum Volatility This strategy tilts towards stocks with low volatility. Because these stocks offer the prospect of smaller gains and smaller losses they are ignored by investors who are attracted to "lottery tickets": stocks with a low prospect of very high returns despite the fact they also have a much higher likelihood of losses. This the effect caused by investors trying to "make back" their losses.
 In other words the higher expected return of the low volatility portfolio (high likelihood of small losses and small gains) is rejected in favor of the higher risk portfolio with a lower expected return but a perceived higher potential of a "big gain" to make back losses. This low/minimum volatility strategy can also be incorporated through low cost ETFs. This strategy has shown long term outperformance by showing smaller losses relative to a market cap weighted index during market downturns while underperforming in strong up markets. It represents a "free lunch" that efficient markets theorists say cannot exist: higher returns without an increase in risk.

If in the past the work of Nobel Prize winners seemed esoteric with little relationship to real world decisions we all make this is clearly not the case with regards to Thaler's work. This time around with academic work that doesnt include books full of equations the Nobel Prize winning work is accessible to all. Reading Thaler' very readable accessible and entertaining book Misbehaving is highy recommended...a rational choice of reading material.

One last anecdote: when asked how he would spend his Nobel prize money Thaler replied "as irrationally as possible".

Tuesday, October 3, 2017

Third Quarter 2017 Market Review

Equities around the world had a strong quarter with non- US stocks outperforming those in the US.

 US stocks were up 4.5%. Among” smart beta” factor ETFs momentum had a very strong outperformance while minimum volatility outcome to be expected in strong up markets (details in table below).
Once again led by the FAANG stocks Facebook, Apple, Amazon, Netflx and Google which together make up not only 10% of the S+P 500 but a very high weighting in many actively managed mutual funds (Netflix has a small weighting in the S+P 500.
Except for Apple, the above noted stocks that dominate the market weighting trade at high valuations. Amazon trades at a price earnings ratio of 195 –the company plows all its cash flow from businesses back into business development. Therefore showing high revenues can capital investment but low profits.  Facebook with a  p/e of 38 and Google trades at p/e of 34.5 are well above the market p/e..which itself is historically high (see below)
Depending how one looks at these stocks : Amazon on its way to dominance in just about everything and Facebook and Google now replacing broadcast television and other media as the primary destination for advertising the valuations are either justified or the companies are reaching the law of large numbers and simply can’t grow enough to justify their valuations.  Apple which I would view as most vulnerable to challenges trades well below the overall market valuation with a p/e of 14.5.
The top performing sector for the quarter was technology (ETF XLK) up 8.4% nearly twice that of the overall market.
The major concern voiced by market observers are the historically high valuations of the US market (which is partly a product of the stocks mentioned above). As can be seen from the chart below we are at relatively high historical valuations. It must be noted that this concern that this has been the case for several years as the stock market continued to rally. Those that have timed to market because of valuations have missed out on the market gains.

S&P 500 Price Earnings Ratio Current 25.18 Long Term Mean 15.67

Part of the underpinning for the market rally has been better economic conditions and growth in corporate profits which seems likely to continue. Of course, the strong rise becomes self-reinforcing due to the well-known momentum behavior of investors.
  Also supporting the equity market was the low interest rate policy of the Federal Reserve since 2008. That easing cycle has ended with a gradual increase in interest rates. This has begun to remove one of the factors making investors feel they had “nowhere else to put their money” in a world of near zero interest rates. This movement away from seeing stocks primarily as a “bond replacement” can be seen in the recent underperformance of dividend weighted ETFs as well as REITS.
One widely observed measure of the attractiveness of stocks vs bonds is comparing the dividend yield of stocks vs. bonds. As can be seen from the chart below recent rises in stocks have tilted the measure in favor of stocks. Further increases in rates will accelerate this trend.

While high valuations and higher interest rates should be a drag on US equities but likely not enough to spark a sharp drop and for the nearer term positive although lower returns than we have seen as late. This would be due to the positive fundamentals: low inflation, good economic growth and continued positive trends in earnings.
 Combining market cap weighting with “smart beta” holdings in small value and minimum volatility should shield portfolios a bit from any market declines.
US Equities
3 Q
1 yr.
US total Stock Market
US Fundamental Large/Mid Cap
Small Cap Value
US Momentum
US Minimum Volatility

Non- US Equities have outperformed the US of late with European equities hitting record highs and emerging markets showing their best performance since 1979.
European economies across the board have been improving and markets have already factored in the impact of Brexit for the Eurozone –and even for the UK which shows strong performance although well below the Eurozone. Unlike the US the European central bank has given little indication of moving to raise rates. Lower valuations, underweighting of many portfolios to non- US stocks, and a positive interest rate environment make for a benign environment for European stocks possibly continuing their outperformance vs. the US.
 A tilt towards the core Eurozone countries and specifically Germany has continued to be a more profitable strategy vs. an allocation to the overall developed market which includes the UK and the perennial laggard Japan. This reinforces an argument I have made about both the developed market asset class which includes the diverse markets of Europe and Japan in a single index.

Emerging Markets have continued to show extremely strong performance based on a benign political and economic environment. China’s growth remains strong as does that of the export oriented countries in the rest of Asia. Tensions with North Korea and the risk of economic crisis in China are always potential negatives for the Asian markets but the latter would likely impact markets around the world as well. While overall emerging markets which include Latin America and Russia the Asia only emerging markets have shown better performance illustrating here too that the asset class of emerging markets including Asia, Latin American and Russia is not particularly useful way to allocate portfolios.
Looking forward strong fundamentals remain in emerging markets, Institutional investors as well as individuals are underweighted in these markets factors likely to generate more buying.  Emerging markets always have “hot money” flows which chase performance which would drive performance in the short run. But investors in the long term are better off sticking to their allocation in emerging markets rather than chasing performance.

A performance chaser in emerging markets would have likely wound up selling at extreme lows and buying well after market recoveries begun. Emerging markets are only for those with a strong stomach and a commitment to keep to their allocations.

Monday, October 2, 2017

Active Fund Managers :Stock Pickers or Part of the "Mob" ?

One of the greatest cliches heard in the financial markets from active managers is that the market is in a "stock pickers market". With the growth of ETFs their new argument goes, investors are mindlessly buying stocks in an index while stock pickers can find undiscovered gems.

But the evidence shows quite the opposite. Active managers are more part of a performance chasing mob than individual investors in ETFs. The big outperformers this year have been the "FANG" (more correctly (FAANG)stocks: Facebook, Amazon,Apple,Netflix and Google (alphabet).

As noted in this analysis active fund managers have large overweights in the FANG stocks even though they reduced them as of this September 6 report>

Fund managers are no longer as smitten by the FANG stocks as they used to be even as they continue to pile into technology stocks for the seventh consecutive month, according to a research note from Bank of America Merrill Lynch (BAML). Large cap fund managers now have a record overweight(vs the S+P 500) in the sector but are opting to rotate out of the FANGs

Alphabet Inc

in favor of less crowded stocks.

This year, the FANGs' stock performance has far outpaced the S&P 500 Index. Now, it seems that fund managers are starting to conclude the FANGs' biggest gains are over. Look at these numbers. Fund managers’ overweight position in FANG stocks has dropped from 71% to 64%, 

And where did those managers mover their money that left the FANG stocks ? into another hot sector.:

 their overweight positions in tech, internet retail and other non-Fang stocks has jumped from 16% to 22%, according to BAML.

Which investors are actually taking too much risk by concentrating in tech and FANG? those active managers..or the investors in the largest ETF SPY=the S+P 500. Of course the FANG and technology stocks can't be "overweighted" vs the index...they are the index.

Netflix makes up less than 1% of the SP 500 but apple, amazon, facebook, and google make up a combined 10% certainly a high consider that active managers are 60% overweighted .All of those stocks except Apple carry high valuations far higher than the S+P 500. Amazon which plows most of its money back into investments has a p/e measured at an astronomical p/e based on actual earnings of 2016 of 195.

 Add to that the fact that they have moved their sales of those stocks into technology many of those high flyers of late and it is hard to see how the active managers have done stock picking by "going against the crowd".

If the growth of indexing has created opportunities for stock doesn't seem like those stock picking active managers are doing much research..they are just following the herd and buying what is going up...not searching for undiscovered gems.

Investors a who included "smart beta" strategies such as momentum and small value in their  ETF (which carry fees a fraction of those even on the lease expensive active funds) portfolios would have  lower weight for the fang stocks than the active managers and the sp 500. Interesting the Momentum ETF (MTUM) includes only one of the Fang stocks among its top ten holdings--the one with the lowest p/e of the group..Apple. And of course small value ETFs like VBR don't hold any of those stocks at all.

So which investors are blindly chasing stocks because of recent performance: the active fund manager or the investor who holds the SP 500 or ETF r an ETF portfolio that includes some "smart beta "holdings ?

Confused ?

I see things like this all the time but I cant recall the same publication contradict itself this way within three business days

WSJ September 29

Dow Deja Vu: ‘Trump Trade’ Regains Favor

Investors betting the Fed will raise rates and Republicans will make headway on tax overhaul

WSJ October 2

Two Signs the ‘Trump Trade’ Isn’t Really Back

WSJ October 3:

....The White House tax plan is the big opportunity for investors right now, and many see the risks only about whether it will happen and how big it will be, not in how it will affect the market. It just seems obvious that tax cuts will produce effects similar to the “Trump trade” that gripped the markets after Donald Trump’s election last year. Stocks will rise, led by banks, smaller companies, high-tax companies and economically sensitive cyclical stocks. Bond yields and the dollar will go up, and emerging markets will underperform.
The trouble for investors is that exactly this has already been happening in recent weeks. If it was all about taxes, these market trends would suggest there has been a huge reassessment of the prospects of the plan passing Congress.

Sunday, October 1, 2017

I am Trying to Figure Out Why This Would Draw Investors Back into Hedge Funds

Apparently hope springs eternal and the industry is a genius at marketing because I cant understand the following :

from the WSJ

Hedge Funds Ain’t Dead Yet

With an improved environment for stock picking, the average hedge fund is up an average 5.4% through August

Written off less than a year ago as overpriced and underperforming, hedge funds are pulling off an unexpected two-step this year: Making money and taking in new cash.
The average hedge fund is up 5.4% through the end of August, while stock-focused hedge funds have gained 8.31%, according to the researcher HFR. Over the same period, the Standard & Poor’s 500 rose 11.9% including dividends, while the traditional 60-40 split of stocks and bonds would have earned 8.9%.
That makes this year the industry’s best relative performance in a rising market since 2010. Investors, particularly in Asia and the Middle East, have begun sending new money hedge funds’ way, attracted by the better returns and a broad lowering of the industry’s famously hefty fees.

So a middling performance using what is by a riskier strategy and more expensive investment vehicle than a simple index fund attracts investors...color me confused

One example that investors in hedge funds could find themselves a part of is described in the article

One of the biggest rebounds is under way at Brahman Capital Corp., a New York hedge-fund firm that flew under the radar for more than three decades.
At its apex around two years ago, Brahman managed more than $5 billion, as principals Mitchell Kuflik and Robert Sobel bet big on hedge-fund favorite Valeant Pharmaceuticals International Inc. When Valeant’s stock plummeted from $257 to $14 a share, Brahman fell in turn, as the firm reported losses and investors pulled their money.
Brahman sold Valeant stock last year and with what is now $3.8 billion of remaining cash pivoted to new ideas like a stake in travel company Expedia , people close to the firm said. This year, Brahman’s main fund is up 17%, the people said

With the availability of so many low cost ETFs both capitalization and weighted systematically towards factors that have been found to potentially add to returns it is hard to justify the use of hedge funds even at fees reduced from the old style "2 and 20".

As for the claim of a better environment for stock picking I cant remember a time when I haven't heard that one and not seen results that justify the claim.

Monday, September 18, 2017

Betterment Joins Wealthfront In an About Face About Smart Beta

Betterment has joined its major Robo Advisor competitor Wealthfront in doing a 360 on the use of "smart beta" in its portfolio,

From their website in an article published in June of 2015
Market Capitalization: Still the Anchor
The starting point for any allocation model is a market capitalization-weighted portfolio.  By anchoring to market capitalizations, you free ride on the collective wisdom of millions of investors and traders globally. You also know how much you are diverging from market allocation; that divergence is the foundation for generating outperformance.
The same logic can also inform portfolio construction for clients who want to take on more or less risk. While the market holding of U.S. small caps, for instance, reflects the risk that investors on average are willing to bear, individual investors may be comfortable with more or less risk in their portfolio. It is up to the individual advisor to determine how to take on more or less risk while still maintaining a diversified portfolio.
The cleanest way to do this is to use the global market as a benchmark for determining asset allocation. Allocations should consider the market value of available assets; the implied expected returns from those assets should guide a proportional allocation to the different markets. This was the insight behind the pioneering work of Fischer Black and Bob Litterman in creating the Black-Litterman model for creating diversified portfolios at every risk level.

Based on that approach this is how their asset allocation is described on the website
Our U.S. exposure covers the total U.S. market with a slight tilt towards value and small-cap stocks. The value and small-cap tilt has tended to beat the market in the long term, based on research by Nobel-prize winner Eugene Fama and Kenneth French

Here is their list of  ETFs used in their" simple" portfolios using market cap weighted ETFs

An article on their website from 2016 entitled  How Active is Your ETF Index I


A new breed of ETFs is similar in name only to passive ETFs, but instead exhibits the characteristics of a traditional actively managed portfolio—particularly in fees and turnover, and for less than certain higher returns.
Examples are inverse (or “short”), leveraged, and smart-beta ETFs. Smart-beta funds may only confuse rather than help most investors.
According to a Wall Street Journal report, smart beta funds’ stocks are weighted “by rules or ‘factors’ other than their market value, such as their dividends, value or low volatility.”
While proponents say that these funds can outpace a straight index over extended periods—say, a full market cycle or two, “don’t expect outperformance every year,” said the report.
In fact, according to, “Actively managed ETFs by design are expected to deliver outperformance, but they often underperform their benchmarks.”

Investors should also be aware that smart-beta ETFs rely on the actions of fund managers who dictate the actual execution of the fund’s investment strategies

I would note that many of the smart beta ETFs specifically state that the readjustments are made quarterly to avoid transaction costs and many  are available with very low fees

That atttitude towards smart beta at Betterment was then...this is now:
In a September 2017 addition to its website Betterment announces

IIntroducing Our Smart Beta Portfolio Strategy by Goldman Sachs

Betterment will now offer a smart beta portfolio strategy developed by Goldman Sachs Asset Management. The strategy reflects the underlying principles of Betterment’s core portfolio strategy while seeking higher returns by deviating away from market capitalization in and across asset classes.
The website includes a nice explanation of smart beta for people like me and someone who has taken a few courses in finance with citations to other research. But how many of its clients will understand the strategy be able to make the judgement as to whether to use the strategy in their portfolio and to stick to the strategy.
The website notes
Why invest in a smart beta portfolio?
As we’ve explained above, we generally only advise using Betterment’s choice smart beta strategy if you wish to attempt to outperform a market-cap portfolio strategy in the long term despite potential periods of underperformance.
For investors who fall into such a scenario, our analysis, supported by academic and practitioner literature, shows that the four factors above can persistently drive higher returns than a portfolio that uses market weighting as its only factor. While each factor weighted in the smart beta portfolio strategy has specific associated risks, some of these risks have low or negative correlation, which allow for the portfolio design to offset constituent risks and control the overall portfolio risk.
Of course, these risks and correlations are based on historical analysis, and no advisor could guarantee their outlook for the future. An investor who elects the Goldman Sachs Smart Beta portfolio strategy should understand that the potential losses of this strategy can be greater than those of market benchmarks. In the year of the dot-com collapse of 2000, for example, when the S&P 500 dropped by 10%, the S&P 500 Momentum Index lost 21% 

That's a alot to absorb for the Betterment customer who was marketed a service that was supposed to simplify their investing (and the explanation of smart beta is likely to make the eyes of everyone but a finance geek glaze over ,...and those people are likely self directed investors in any case..
I would think that based on the description above few people would turn down the opportunity to outperform the market weighting in the long term and few people think they would abandon a strategy becase of short term underperformance. in the short term. No one thinks they will be the investor that will panic and sell everything...they have read that is the wrong thing to do...but obviously many people do it. And few would turn down the opportunity to outperform the market based on historical analysis and a portfolio created by Goldman Sachs based on state of the art academic research.
I also dont understand the example given above of how the momentum factor did during the dotcom crash of 2000 . It would seem to me anyone from Betterment explaining the Goldman Sachs strategy  to a client would explain that moementurm is only one of 4 factors used in the strategy. In fact pointing out the performance of the momentum factor is a good argument in favor of the Goldman Sachs approach.
We have been hearing from customers that different portfolio strategies would be better fit for different goals,” Dan Egan, director of behavioral finance and investments at the firm, told ThinkAdvisor. 
"Betterment has an increasingly diverse customer base; they all want to put their money to work, but not necessarily in the same way," said Betterment founder and CEO Jon Stein, in a statement announcing the new portfolio strategies.
The Goldman smart beta strategy is designed to deliver stronger risk-adjusted returns than traditional market-weighted index funds generate. “Clients are a bit uncomfortable with market-cap weighted systemic approach,” says Egan. Trademarked as ActiveBeta, the Goldman strategy is based on four drivers (factors) of performance: value, momentum, quality and low volatility

From the website this additional note about the portfolio allocation
It tends to have higher allocation to emerging markets and small-cap stocks in the U.S. and developed economies and includes REITs and high-yield bonds with longer duration. Its expense ratios range from 0.11% to 0.24%.

I am confused by the above Goldman Sachs Active Beta (available in its ETFs) has nothing to do with REITs and bonds.
It is really hard for me to imagine that clients of Betterment which at least initially was sold as a simple solution to investing were sophisticated enough to express the fact that they were uncomfortable with a market cap portfolio. There is enough debate around professionals and academics on this issue its hard to imagine many Betterment clients have reached conclusion on this. And did those investors sophisticated enough to want a non market cap weighing for their stocks also indicate they were comfortable getting it as part of a "package deal" with the REITS and long duration high yield bonds?
I have nothing against smart beta. I have been using it in client accounts through mutual funds of Dimensional Fund Advisors before there were ETFs in this category and when their form of smart beta was called a tilt to the factors of size and value. And I have incorporated smart beta ETFs into client portfolios.
I also think the Goldman Sachs product has potential to be an excellent addition to portfolios in addition to or in place of ETFs based on only one of the "smart beta? factors
But I do think it will be extremely difficult for investors to understand and choose between the "new Betterment portfolios and the "old ones". And it seems Betterment investors can only buy the "whole package"that goes with a smart beta ETF. I think if they truly understood the "new portfolios" they might opt for making use of smart beta but passing on the allocation to other elements of the portfolio. I have seen lots of research with evidence of the outcomes of use of the smart beta factors. I have never seen at research about benefits of adding REITs and High Yield Bonds to such a portfolio.
The Betterment website cites the research of Rick Ferri on the advantages of a low cost index portfolio. But Ferri also has written and article entitled

The Dark Side Of Smart Beta

and doesn't make use of the strategy in his client portfolios.

I am totally biased of course but I would argue that incorporating "smart beta " in a portfolio is a decision best made by a dedicated do it yourselfer or someone working with a personal advisor that doesn't present only two choices   "smart beta" and "non smart beta" portfolio which ultimately is one  (actually one of  two) size fits all and can clearly explain the strategy.

In the No Surprise Department

from marketwatch

Hedge fund closures still outnumbered launches in second quarter

Hedge fund performance continues to lag the overall market, as measured by the S&P 500 SPX, +0.15% The HFRI Fund Weighted Composite Index is up 5.4% thus far this year (through the end of August), a gain that is less than half the 11.9% rise of the S&P.
While hedge funds are designed to do more than simply provide exposure to a particular market—for example, they can employ more complex instruments, like derivatives and leverage—investors have lately shown far more interest in broad-market funds that simply track a major index.
Beyond the fact that the S&P has long outperformed the average hedge fund—winning Warren Buffett a $1 million bet in the process—such products can be purchased for significantly less money. The average hedge fund management fee was 1.46% of assets in the second quarter, with the incentive fee coming in at 17.2%. To compare, an exchange-traded fund that tracks the S&P 500 can be had for as little as 0.04% of assets.