Cathie Wood’s Ark Shows Chasing Alpha Isn’t What It Used To Be

By Bloomberg Markets Live commentator Ven Ram

Back in the day, Warren Buffett’s Berkshire Hathaway used to earn compounded annual returns of around 22%-23% consistently.

While Buffett is among the shrewdest investors we know of, he was also lucky in that he got to revive Berkshire in the Seventies and Eighties when the entire fund-management industry was but a fraction of the size that it is today. In other words, finding alpha was relatively a less-daunting and onerous task than it is now.

So when Cathie Wood says her funds “could deliver a 30%-40% compound annual rate of return during the next five years”, one has to ask the question what her team is unearthing by way of research that would allow her fund to do twice as good as the Oracle of Omaha himself during his best period of investments.

Wood’s Ark Innovation has come under the harsh glare of investor scrutiny in recent weeks, what with the fund having lost about 20% in value this year against a backdrop where both the S&P and Nasdaq 100 have returned more than 25% each.

To be fair to Ark, it’s harsh to judge a fund based on just one year’s performance, but it’s fair to say that if the Fed were to raise rates as envisaged by its December dot plot, stock valuations would come under harsher scrutiny, making Wood’s lofty goal even more challenging — and worthy of lofty admiration should her fund’s returns reach for the sky as promised.

And the challenge to Ark encapsulates also the challenge faced by the wider, active-management community. With tons and tons of analysts poring over every single stock these days, any special edge that you could find in an earlier era by way of research is hard to come by, meaning finding alpha is fiendishly difficult these days.

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